Chicken and chips crisis shows normality is some distance away

First there were empty supermarket shelves and “pingdemic” staff shortages; now Nando’s is out of chicken and the car industry short of chips. It’s an unusual state of affairs for a country where normality was supposed to resume a month ago.

Richard Partington 

After the lifting of most pandemic restrictions on the government’s 19 July “freedom day”, the long hard slog of Covid-19 was meant to be all over bar the shouting. Britain’s economic potential would be unleashed, allowing for the fastest growth since the second world war.

Significant progress has indeed been made. Far from the jobs crisis forecast at the onset of Covid-19, unemployment is falling and businesses have survived, helped by billions of pounds of government support.

Yet in this new version of normality, substantial challenges remain, as the initial buzz from the reopening of shops, pubs and restaurants begins to fade.

Retail sales suffered an unexpected fall in July, while Bank of England figures for credit and debit card transactions – covering the full gamut of sales in hospitality, travel and other services in addition to retail – show consumption has plateaued.

Confident forecasts for an unprecedented boom in consumer spending, fuelled by more than £200bn of household savings built up during lockdown, feel wide of the mark after most Covid restrictions ended – the supposed moment for their release.

So why is Britain only managing to muddle through? Listen to government ministers and a telling tonal shift offers a clue. Earlier this year, the hope had been that Covid could be beaten with the help of vaccines. But there is now a growing realisation that persistently high cases fuelled by the Delta variant, and high infection rates in other countries where vaccination rates are lower, mean normality remains some distance away. As the health secretary, Sajid Javid, is now fond of saying, we must “learn to live with Covid”.

For this reason, economic disruption related to the pandemic is likely to remain for longer than anticipated. Which brings us back to the problems with chicken and chips.

Peri-peri chicken wings became the latest casualty of Covid-related upheaval last week because Nando’s is struggling with staffing problems at its suppliers’ factories, as well as shortages of lorry drivers holding back deliveries.

Toyota said this week it would be forced to reduce global production in September by 40% owing to shortages of microchips around the world. Other car manufacturers, including Ford, Nissan, Honda and Jaguar Land Rover – Britain’s biggest carmaker – have also scaled back production for similar reasons.

In a sign of how the pandemic must be beaten globally before the UK and other economies can declare a return to normal, Toyota pinned the blame mostly on outbreaks in south-east Asia leading to delays in the delivery of components.

Opponents of Brexit have been quick to blame Britain leaving the EU for empty supermarket shelves and supply chain disruption. But many of the trends are international, with driver shortages evident in several countries. German companies are struggling and most expect such problems to persist into next year.

That said, erecting tougher trade barriers during an international supply meltdown is far from a bright idea. Politically motivated trade restrictions reduce the possibility of solutions being found and are indeed making a bad situation worse.

Against this backdrop, supply chain disruption risks feeding through to the price of goods in the shops. The Bank of England expects inflation to reach 4% this year as the economy reopens with supply constraints still dogging businesses – far higher than originally expected at the start of this year.

For several months Threadneedle Street has attempted to reassure us that this inflationary burst will prove temporary. There are good reasons for this, with much of the inflation rise down to the fact that a broad range of consumer prices fell sharply during the first lockdown. The measure for the cost of living is calculated using the annual change in the price of a basket of goods and services. It’s hardly surprising the only way is up after the catastrophe of 2020.

In one example, average petrol were 132.6p per litre in July 2021, compared with 111.4p a year earlier, a rise of 19%. But compared with January 2020 – before Covid sent global oil prices into a tailspin – petrol prices are just 4% higher.

Meanwhile, analysts believe inflationary pressures should fade as Covid disruption recedes. But if countries key to global supply networks face prolonged challenges due to slower progress with vaccinations, and if Delta means more disruption in the UK, how long might this “temporary” period prove?

With the world economy suffering Covid for longer than expected, analysts at NatWest believe it could take until late 2022 for elevated supply chain costs to fade. These pressures will prompt serious questions for how big central banks, including the Bank of England, plan to respond to prolonged periods of transitory inflation.

At this point, the evidence is that further pressure is looming. The Baltic dry index, the shipping industry’s bellwether, which measures the average prices paid for the transport of dry bulk materials across more than 20 routes, has hit a 10-year high in recent weeks in a sign of the mounting costs facing companies.

Though inflation fell back slightly in July, official figures show UK manufacturers are being hit by higher fuel and raw material costs. Industry’s input prices rose by 9.9% in the year to July, up from 9.7% in June. Labour market vacancy rates have hit record highs as many companies struggle to find enough workers.

Not all of these costs will be passed on to consumers. Companies fear they will lose customers if they jack up prices too far, and will allow profit margins to take some of the hit instead. And goods shortages do not always lead to inflation – sales may be forgone rather than prices raised – as evidenced by an unexpected fall in sales of electrical goods in July amid supply chain disruption.

However, supply disruption is the early signal of what living with Covid might look like. Rather than simply encouraging the nation to adapt, ministers need to do a lot more to tackle the economic consequences.