The cost of living: up, up, up we go

The cost of living in the UK and Europe is expected to rise this winter amid shortages in HGV drivers and spiking gas prices. Petrol stations are experiencing large queues and have introduced rationing whilst stores are experiencing shortages of certain foods. The Prime Minister of the UK, Boris Johnson, has already used emergency measures, relaxing laws to extend the working hours of drivers and propping unprofitable CO2 factories; he is expected to draft further measures such as calling in the Army.

Driver Shortages

It has been a long time coming. The European haulage industry has been dire state for the last couple years with 400,000 fewer drivers than required estimates the Financial Times, 100,000 of which are in the UK says the Road Haulage Association. The Freight Transport Authority estimates 64% of logistics firms are suffering ‘severe shortages of skilled labour’ simply not enough people are training to become drivers. Around one million letters have been sent appealing to people with HGV licences but hours are unsociable, requiring lengthy periods from home and wages have sat stagnant even amidst the COVID-19 pandemic where online shopping boomed. Many don’t last in the industry and too few are training owing to the industries stigma. New visa laws in the EU are set to make it harder for drivers to operate in the UK. Simply put, there are too few lorries are unable to carry final goods to their final destination.

Even so, this is not a local issue as transport costs have risen across the globe. At the start of the pandemic shipping firms expected global trade to plunge idled 11% of the global fleet. Hundreds of container ships were scrapped due to high steel prices. This has pinched global trade capacity. Exacerbating this is a global mismatch in capacity. Los Angeles and Long Beach have over 40 ships anchored serving as glorified warehouses for containers, in order to avoid clogging ports, trains, and lorries; Chinese ports are clogged too with ships whilst the Atlantic struggles for numbers. The average door-to-door shipping time has increased from 41 to 70 days from a year ago, says Freightos. This has led to a ballooning in shipping costs. Spot rates, seen below, drive most of day-to-day trade so can significantly affect inflationary pressure.

The upshot of this is shortages. Companies like Argos, Wetherspoons, Heineken, and supermarkets have been experiencing shortages for weeks and, recently, petrol stations have suffered shortages. The FTA estimates that the logistics industry creates £124 billion gross value added each year. Lack of drivers has meant idling factories and firms unable to produce goods or provide services. To combat these wages have surged in recent months. East Anglia, England, saw wages rise by 30%. But take-up has still been low.

Economists expect these bottlenecks to spur inflation has transport costs rise across Europe.

Gas prices

The spike in European natural gas costs causing soaring energy prices and a potential food supply crunch.

EU push back at Nordstream 2 and poor energy diversification for industry has encouraged gas insecurity. But last years cold winter (globally) reduced strategic reserves as Europe was outbid by Asian markets. The COVID-19 pandemic further prevented the easy build-up of reserves due to increased barriers of trade.

Spot-rates in the UK have risen by 250%, see below, to €73.15 (£62.48) leading to a collapse in the energy industry from 70 UK firms to around 10. Gywn Day, former Head Trader of an Investment bank, expects this could fall to around 6-7 firms, a more oligopolistic set up. He argues the price surge was foreseeable but the magnitude of firms falling has shown poor planning. The conservative government is not expected to intervene, except for raising price caps, to prevent future moral hazard by energy firms and free-riding.

Price-caps have squeezed companies margins for years. This combined with small market share meant firms didn't have deep enough pockets to buy forward on the market. This may have worked well for when gas prices were low allowing small incremental profits when prices dropped but the sudden surge means shareholders are losing money per-unit sold, so have called it quits.

As a consequence, several industries have been hit by higher costs, particularly foodstuff. CF industries, who produces 60% of the UK’s commercial CO2 shut it plants down as gas prices soared. George Eustice, Environmental Secretary, said prices would rise from £200 to £1000. CO2 is an important agent in stunning animals for the slaughter so the lack of it was in danger of shutting down 25% of the British pork industry.

This all together has worried banks. Soaring energy, house, and food prices combined with strong wage growth may signal the return to stagflation and period of slower growth.