Sky-high fertiliser prices and the Ukraine war mean far fewer crops are being planted – storing up a serious calorie deficit.
Even before Russia invaded Ukraine in late February, UK inflation was at a 30-year high. As we emerged from lockdown last year, and demand surged, the economy struggled to respond, pushing prices up.
Far from just a British problem, this reflected supply chain pressures across the world – as factories everywhere grappled with shortages of semiconductors and other vital inputs, as well as logistical and staff-related dislocation, the debilitating impact of lockdown proving difficult to shrug off.
Now, of course, Western sanctions on Russia, and Moscow’s countermeasures, have sent commodity markets into overdrive, pushing global inflation up much more.
America’s Consumer Prices Index rose 8.5pc during the year to March, the sharpest rise since December 1981. President Biden banned all oil and gas imports from Russia last month, with much being made of strong US production. Yet, US energy prices are still 32pc up on a year ago, according to official inflation data.
In the UK too, CPI inflation hit 7pc during the year to March, way beyond the Bank of England’s 2pc target. The Retail Price Index – a broader inflation measure including housing costs – was up 9pc in March.
Even more ominously, last month’s Producer Price Index – covering inputs firms use to produce what they then sell to us – was no less than 19.2pc higher than a year ago. Obscure PPI data has historically proved a good “leading indicator” of where headline inflation is going.
Unless firms pass on elevated costs to consumers, they ultimately go bust.
Just as in the US, conflict-related energy price spikes are driving inflation higher in Britain too. Transport fuel prices jumped 30.7pc during the year to March, with household electricity prices up 18.1pc. Then there’s the 54pc rise in the Ofgem household energy price cap – in place since the start of April. That sent average utility bills for the 22 million households not on fixed-term deals up from just under £1,300 a year to almost £2,000.
This whopping rise isn’t reflected in the latest inflation numbers, of course, which relate to March. So CPI and RPI inflation will increase further, and PPI even more so, as the Ofgem cap doesn’t apply to firms. And with wholesale energy prices still sky-high, expect that cap to go up again this autumn.
Over recent weeks, as the economic fallout from this Russia-Ukraine conflict has become apparent, attention has focused on energy prices. That’s understandable given that Russia is an oil and gas superpower.
During the Cold war, western Europe’s reliance on Soviet energy exports, while barely mentioned, was never far from the minds of geopolitical strategists. Since then, of course, that reliance has grown.
Memories of the 1970s loom large, when successive oil price shocks – then due to politically-motivated Arab oil embargoes – hammered the West, as inflation soared, sparking stagnation and widespread trade union unrest. There are signs of that happening now. Average UK wages rose by just 3.8pc over the past year, with inflation almost twice that and set to rise much higher. As earnings continue to lag the rising cost of living, industrial relations are definitely getting more scratchy.
And when the cost-of-living rises, and people have less purchasing power, the economy slows. Data last week showed the growth of retail sales stagnating. The UK’s post-pandemic recovery has most definitely lost its bounce.
Yet when it comes to serious economic fallout, it strikes me that what matters more about this Russia-Ukraine conflict than the impact on energy prices is the impact on the price of food.
The Western political and media class has yet fully to grasp the pivotal importance of Russia, Ukraine (and Russia’s ally Belarus) in the global agricultural supply chains. World food prices jumped nearly 13pc in March alone, according to the Food and Agriculture Organization’s price index, in large part due to the impact of this conflict.
Both Russia and Ukraine are major producers of wheat, barley and others crops – millions of tons of which are exported via Ukraine. Ordinarily, around a third of the world's grain exports are shipped from Black Sea ports, exports which have basically collapsed.
If the right political deals are struck, fuel supplies can be boosted pretty quickly. Embargoed energy from Russia (or Iran) can be released on global markets, or the Saudis can turn the spigot, bringing prices back from the stratosphere.
Yet crops need to be planted and animals reared over time – and this Russia-Ukraine conflict is messing with that. Not only is planting in Ukraine itself seriously disrupted, but as this war and related sanctions drive up fertiliser prices, that’s affecting planting much further afield too.
Russia, Ukraine and Belarus account for about two-fifths of world’s potash exports and between them export almost a third of fertilisers made from nitrogen and phosphorous. Pretty much all such exports are now blocked either by sanctions or conflict – one reason UK farmers are paying up to five times more for fertiliser than this time last year.
So just as UK food security is coming into focus, British farmers – hit with both spiralling fuel and fertiliser prices, their two main costs – are now planting less, not more.
Having said all that, the most serious economic fall-out from this Russia-Ukraine conflict, outside of Ukraine itself, will be felt beyond the West.
The world is, to a large extent, still eating crops harvested in 2021. We will soon switch to food produced this year. But sky-high fertiliser prices mean much less is now being planted – storing up a serious calorie deficit.
Already, in Egypt, the jump in the state aid needed to make traditional flatbread affordable for the poor is straining the Cairo government’s budget. In Turkey, cash-strapped shoppers are forming long lines to buy cheap, government-issued bread, now unaffordable on the open market.
The Arab Spring – the series of protests and armed rebellions that spread across North Africa and the Middle East in the early 2010s – was sparked and sustained in large part by spiralling food prices. These regions depend heavily on gigantic crop shipments, not least from Russia and Ukraine.
About the Author: Liam Halligan is a writer for The Telegraph