On Pancake Day it’s not just lemons that are feeling the squeeze

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It's Shrove Tuesday today. As ever I have found myself having to search for Delia's recipe for pancake batter, which slowly gets forgotten as each of the three-hundred-and-sixty-four days not designated to eating pancakes passes.

But today is not just Shrove Tuesday. It is also the day that inflation statistics are released. And something struck me when I was checking through my list of pancake ingredients. There have been some significant increases in the prices of basic goods in recent years. Flour and eggs are approximately one third more expensive than they were five years ago. And over the same period the price of butter has increased by nearly two thirds.

In fact, if you weigh out all of your ingredients, the price of making pancakes has risen by 30% in the last five years. This compares with an increase in average wages of only 10% over the same period.

The price of making a pancake has risen three times as fast as wages in the last five yearsComposite index, 2007 = 100. Based on the following weightings (makes 12-14): Flour (cereals), 100g; eggs, 2; milk, fresh, 200ml; water, 75ml; butter 50g.

Today's CPI data confirms that prices have continued to rise faster than wages, as the consumer price index rose 2.7% in the year to January, while the latest available data for average earnings showed an annual increase of 1.5%.

This squeeze on households has been one of the factors holding back the recovery in the UK, as consumer spending growth has remained weaker than might otherwise have been expected.

But it's not just households who are feeling the pinch. Some manufacturers, particularly in the Food and Drink sector, have felt significant pressure on margins from increases in input costs on one hand (for example poor harvests have pushed up prices of cereals and potatoes) while on the other hand, weak demand from squeezed consumers has pushed down the prices that goods eventually sell for.

So what are the prospects for the inflation in the year ahead? We still expect energy and food price pressures to ease in the latter half of the year, and the margin of spare capacity in the UK economy should reduce inflationary pressures, but as ever these forecasts are subject to risks, as political tensions, bad weather and poor harvests can all impact inflation. Tomorrow the Bank of England will release its quarterly inflation report, so we'll have a chance to see the MPC's views on the matter then.


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