Higher agricultural commodity prices at the start of the year raised concerns about the potential impact on retail food prices, should the trend prove persistent. Fortunately, the price of soft commodities (coffee, sugar, wheat etc) appears to have decoupled from that of hard commodities (gold, silver, platinum etc) in recent months. Indeed, data from the last seven quarters indicate that the price of many agricultural commodities has actually fallen.
In order to gauge the collective effect of these changing agricultural commodity prices and how they could potentially feed through into UK inflation, M&G Investments constructed a simple cake index, teaming up Global Commodity Price data with some basic cake recipes. Given that sponge and individual cakes are two of the representative items included in the CPI 2014 basket of goods – and that food and drink items make up 11.2% of the overall CPI index – combining the commodities in this way gives an indication of how future changes might affect the average consumer.
The graph above illustrates the change in various cake costs (since October 2012) versus the UK CPI (yoy %). What is interesting is the generally downward trend of all cake indices in the last seven quarters. Sponge cake and plain scones look particularly good value in recent months, owing to the high proportion of wheat in their recipes, says M&G. Apple cake unsurprisingly provides a price signal for its key ingredient (the price of apples has fallen 4% YTD), while coffee cake gives a less pronounced but similar effect. “Despite the recent June increase in CPI to 1.9% yoy, due to the lag between raw commodity prices and their general price level, we should perhaps expect to see deflation feeding into cake prices and the overall food constituent of CPI in the coming months,” says M&G. “Therefore although it is unclear who exactly was the first to declare ‘let them eat cake! ’, this person may have been on to something.”
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