The economic story of 2022 will be the cost of living crisis

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by Shaun Richards

We advanced on 2022 with concerns about inflation and its impact on the cost of living. Before the war in Ukraine it was already going from bad to worse but it has applied the turbocharger to the engine. The most extreme in terms of an individual example was this which started yesterday.

March 8 (Reuters) – London nickel prices more than doubled on Tuesday to cross the $100,000-a-tonne level for the first time ever, as tension in eastern Europe showed no signs of cooling and growing sanctions against Russia fuelled fears of a disruption in supply.

Three-month nickel on the London Metal Exchange soared 71% to $82,250 a tonne by 0755 GMT. Earlier in the session, the prices shot up nearly 111%, to a record $101,365.

This is in addition to what was considered a lot only yesterday.

The first candidate for something breaking today is the LME nickel market, where a massive short squeeze has sent the price of the metal, key for EV batteries, to an all-time high of $55,000 per tonne, up 90%. What’s Chinese for “Yasuo Hamanaka”? ( @JavierBlas)

What we are seeing is a type of short squeeze seen when Nick Leeson broke Barings Bank by having such a large position in Nikkei derivatives he was out of control and others made him really pay to get out of it.

The London Metal Exchange has given a unit of China Construction Bank Corp. extra time to pay $$$$ in margin calls it missed Monday. ( @JavierBlas )

So we have a Russian war creating a Nickel price surge which has caught out the Chinese who this morning cannot pay and have broken the market.

BREAKING: The London Metal Exchange has suspended nickel trading after a 250% price superspike in two days ( @jfarchy )

Then

LME considering busting all nickel trades done today ( @QEternity )

As an aside that statement is especially chilling if you have been a local ( independent trader) on a futures market like me. That is because you rely on the most basic level that there is a market whether you were taking profits or limiting losses today. To the outsider it may not seem to matter much but it raises the issue of what sort of markets we will have?

But for today’s purposes we are seeing inflation and with the use of Nickel in EV batteries in an area of establishment priority.

Energy Prices

Here we have got used to higher prices but they just keep on coming. The opening of markets on Sunday night saw front month Brent Crude Oil go above US $130 per barrel but there was something even more significant.

Every Brent futures contract through May 2023 is above $100. Every WTI contract through Oct. 2022 is above $100. ( @alexlongley1)

So the price is expected to be higher for longer with obvious inflationary consequences.

Then there is the issue of gas prices starting with the impact on domestic energy costs.

European natural gas prices zoom to a fresh all-time high, rising more than 30% today. Benchmark TTF is trading above €260 per MWh. **** That’s equal to more than $80 per million Btu, or more than $470 a barrel of oil equivalent **** ( @JavierBlas )

Look what it has done in Spain.

Russia knows it is in a strong position here so it is exploiting it.

Russia’s top energy official threatens to cut off natural gas to Europe
🇷🇺 💥 🇪🇺

Russian deputy PM Novak said they have the right to cut supplies to Europe through the Nord Stream 1 pipeline in retaliation for Germany’s decision to block Nord Stream 2 ( @SStapczynski )

If we switch countries we see that this game was in play anyway.

ITALIAN ELECTRICITY PRICES ROSE 50.3% LAST WEEK ( @lemasabachthani )

These issues are in play in the UK as well according to the Financial Times.

UK wholesale gas prices followed oil higher on Monday after the US said it was in “active discussions” with European countries about a ban on imports of Russian crude.UK gas prices hit a fresh record of 800p per therm at one point in a volatile trading session, before falling back to 501p, up 8 per cent on the day. A year ago UK gas prices were trading around 40p per therm.

The changes are eye-watering and we see that they are on their way to us.

Even before Russia’s invasion of Ukraine, UK energy bills were due to soar after regulator Ofgem said the price cap for 22mn households would rise 54 per cent in April to almost £2,000 a year.Experts say the price cap could reach between £3,000 and £3,400 a year in October when it is next due to be adjusted.

There is also another cost on its way but it will be hidden in the public finances.

Sunak in November set aside £1.7bn in working capital for Bulb to keep the company operational until April, after Ofgem concluded it could not transfer its customers to rivals.

Indeed according to City-AM an already bad situation is getting worse.

The collapse of Bulb Energy (Bulb) into special administration could cost taxpayers £3bn after Russia’s invasion of Ukraine sent wholesale gas prices rocketing to unprecedented highs.

Sky News has reported that industry executives and government officials now expect Teneo Restructuring – Bulb’s special administrator – to request hundreds of millions of pounds of additional funding within days to keep buying gas to meet customer needs.

The cost of living

See also  Hungary's PM Orban Tells Parliament Energy Crisis and Rate Hikes Will Bring About "Era of Recession" in Europe.

The Resolution Foundation has been trying to crunch some numbers on this.

 Considering the impact on petrol and energy costs alone leads us to estimate the monthly peak of inflation will now exceed 8 per cent this spring, and could rival the 8.4 per cent reached in 1991 (in turn the highest inflation
since 1982). We now assume that prices in 2022-23 will on average be 7.6 per cent higher than in 2021-22, up from the Bank of England’s forecast of 6.2 per cent in February.

Actually I think we are in danger of double-digit inflation and as I read their report I can see something they are missing.

This ignores any possible impact on food prices which, if it did occur, would be particularly skewed towards low-income households.

Even as it is they think this.

Despite a healthy forecast for nominal earnings growth in 2022-23, further increases in inflation mean real earnings are set to fall even further in the coming year: by
almost 4 per cent using our most recent inflation assumptions.

Also the speed of the increase in inflation means that rises in benefits will be left way behind actual events.

Most income-related benefits are uprated in April by the
previous September’s CPI. This means that most benefits,
including the State Pension, are set to be uprated by 3.1 per cent in April 2022 at a time when the cost of living could be rising by more than 8 per cent.

Comment

As Glenn Frey would say the heat is on and we now look set for double-digit inflation levels. They will arrive from the RPI quite soon and it now looks as if the measure used by the Bank of England or CPI ( because it gives a lower number presently around 2% lower) will get there too. Of course there is uncertainty in that we have seen a lot of moves in the short-term due to the effects of the war in Ukraine and some may unwind. But it is going to be hard to change for example the impact of the price and availability of fertiliser on food prices for the next harvest.

There is some better news ahead but for our political class there is only the hope we will forget what they spouted at COP26 which has morphed into this.

Boris Johnson is preparing to unveil a new UK “energy supply strategy” following Russia’s invasion of Ukraine that could involve more North Sea oil and gas production. ( FT)

The problem is that whilst they were turning down projects ( Shell late last year) we were not only being made to be more exposed but the wait until we could do something about it got longer.

It takes three years on average to produce the first gas from a project after a company has received development consent, according to figures from the Oil and Gas Authority, the North Sea regulator. ( FT)

But at least someone seems to be waking up.

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