Inflation Rates and Rioja

Tasting Notes: Enjoy with a nice Spanish Rioja Tempranillo, no need for a Reserva yet, it's still early days. Ideally find a 2014 vintage, a great year for the grape and also the last time inflation rates were as high as they are now. 

Yesterday saw the Office for National Statistics (ONS) release their July 2016 Consumer price inflation report, the first data set from the government covering the post-Brexit period. 

The Headline: A 0.6% increase means that inflation is now at its highest level since November 2014. 

Quick! Panic and blame Brexit, we'll all be penniless by Christmas!

No. Let's not panic, let's take a leisurely sip of wine and assess the situation.

Yes, sterling took a hit and yes, investor confidence is still down. But while the increase in inflation rates is undoubtedly the result of rising import costs, there are other factors in play.

When looking at the longer-term trends of inflation rate fluctuation, this 0.6% rise is minimal, and only seems high due to 2015 being a year of historically low inflation. Even the ONS made a point of stating that the rise is “still relatively low in the historical context.”

It’s still too early to speculate on the full impact Brexit will have on inflation, especially given the fact that ONS data is collected mid-month, so the vote to leave had only been decided 2-3 weeks previously. 

It was also only a month ago since The Spectator published an article entitled “Inflation is up. But don’t panic, it’s nothing to do with the Brexit”, calming fears that the 0.5% increase in June was a result of the vote to leave when, in fact, the data related to the period before the referendum had even occurred.

Mike Prestwood, head of prices at the ONS, even went so far as to say that “there was no obvious impact on today’s consumer price figures following the EU referendum results though the Producer Prices Index suggests the fall in exchange rate is beginning to push up import prices”. 

Admittedly, producer prices have risen by 0.3%, the fastest rate in 2 years, with the cost of raw materials also increasing by 3.3%.

But, wait! Could it be that the worst is over in terms of a declining exchange rate?

After the report was released, the pound rallied against the dollar, increasing by 1.3% to $1.3038. Could this suggest that sterling is starting a slow recovery?

Probably not, and it almost certainly does not mean we are 'out of the woods' in terms of post-referendum uncertainty. Future CPI data will give a better indication of the Brexit effect, a point confirmed by former monetary policy committee (MPC) member Andrew Sentence, now at PwC, who commented that “The big rise driven by a weak pound will take longer to come through – at least six to 12 months.”

Combine this with the Bank of England (BoE) warning that it is prepared to withstand a period of high inflation in order to stimulate growth and create jobs, this really is just the start of a necessary period of adjustment to the changing market conditions in which we now find ourselves.

Bringing it down to reality, what will this mean for the majority of us, in laymen’s terms?

1)     It’s worse news for savers, and those with pensions. With interest rates already at an all-time low (0.25%), an increase in prices is not going to help the situation.

2)     An increase in fuel prices led to a 1.6% increase in transport costs according to the Consumer Price Index (CPI). This is bad news for commuters as regulated train fares are set to rise again. The increase, determined by the old Retail Price Index (RPI), which always tends to be slightly higher than the CPI, means that, by January 2017, regulated rail fares will have increased by 1.9%!

3)     Real wages could suffer as employers struggle to match pay with rising prices. This will exacerbate the transport issue for commuters, as outlined above, and also put pressure on businesses, who will now need to balance an increase in import prices with a need to pay their workforce a living wage. However, with the BoE focusing on growth stimulation and job creation, the effect may be muted to some extent.

4)     And the worst news… alcohol is more expensive. Not only that, wine is to blame!! According to the ONS report, “the upward contribution came from alcoholic beverages” going on to say that “this was primarily due to prices for wine”. Damn it!

Why Rioja?

Well, Rioja is traditionally produced from a blend of various grapes and, similarly, this month’s inflation increase was caused by a blend of factors, namely depreciation of sterling and rising transport, alcohol and hospitality prices.

Rioja varieties are determined by how long they have left to age. Rioja is the youngest, spending less than a year in an oak aging barrel. Crianza is aged for two years, Reserva at least three and Gran Reserva has two oak barrel years followed by three in a bottle.

Given that it is still very early days post Brexit, the full maturity of the impact has yet to be reached, so stick with the baby for now. As a younger wine, it's also cheaper, which should help you out with the rising wine prices currently being experienced.

Rioja is an old grape with the earliest written evidence of its existence dating back to 873. Inflation must also be viewed in a historical context to get some real perspective on the situation.  

So there you have it, no need to panic, go pour yourself another glass.

Enjoy!

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