Market inflation expectations have jumped in the UK. The UK is particularly exposed to rising natural gas prices. Container freight rates appear to have topped out, but price increases are spreading. It is difficult to argue for ‘transitory’ inflation when the price ‘shocks’, supply or demand driven, multiply.
The latest commodity price spike has been in cotton. The Trump administration banned imports of cotton from the Xinjiang region last year, due to the forced labour of Uighurs. China has since imported more cotton from the US to bypass the new restrictions, making goods in China using US cotton.
Higher prices will ripple across developed and developing worlds. Clothing & footwear has a 7.4% weight in the UK CPI. Apparel has a much smaller weight of 2.69% in the US CPI. The UK seems more exposed (alongside a greater susceptibility to the rise in energy prices), but the US weighting is not insignificant.
ESG regulations could in turn drive further disruption to supply chains in other goods. Cotton may be a harbinger of further price spikes.
Summary
- Energy costs feed through to higher food prices
- Centrals Banks fret inflation may be more persistent
- Cotton prices jump: clothing to exert upward pressure on
