The Dive: Lettuce is just the tip of the iceberg: Inflation around the world

Sascha: [00:00:02] From Equity Mates media. This is the dive. I'm your host, Sascha Kelly. Inflation is the biggest story of the moment. 

Audio clip: [00:00:10] New data shows inflation is the worst it's been since 1981, up 8.6%. 

Sascha: [00:00:16] The rapid climb of the cost of basic goods and services is damaging economies, markets, businesses and your hip pocket as well. And wherever you're listening, chances are you've spotted a sign of inflation today. 

Audio clip: [00:00:29] Gas hit a new.

Sascha: [00:00:31] High in America. A photo of a Los Angeles gas station went viral because it was charging more than $8 a gallon for fuel. In Australia, a photo of a $12 head of iceberg lettuce went absolutely gangbusters. And in the UK, there's fears that one third of the country's fish and chip shops are going to close in the next nine months. These stories have got me wondering, are all of these symbols of inflation unique or are they all being driven by the same factors? It's Wednesday, the 15th of June, and today I want to know what's behind these different stories of inflation and what can we learn from them? To do this, I'm joined by my colleague and the co-founder of Equity Mates Alec, Renehan. Alec. Welcome to the dive. 

Alec: [00:01:14] Thanks, Sascha. We're talking about inflation and today we've gone from one story to three.

Sascha: [00:01:18] Inflation is everywhere, even in our scripts. 

Alec: [00:01:21] That's right. Sascha, wherever you're listening to this story, inflation is affecting you. 

Audio clip: [00:01:25] That translates to families paying an extra $460 a month for everyday items. 

Alec: [00:01:30] Prices are up, interest rates are up, stock markets are down. And we're seeing some big numbers come out around the world. Turkey is easily the worst hit at the moment. It's seeing inflation at 73%. The average prices have almost doubled over the past 12 months. Moldova, 29% inflation. Brazil, 12% inflation. Every continent, every country is saying inflation. 

Sascha: [00:01:55] And you were telling me there's some common reasons for this. 

Alec: [00:01:58] That's right. Two big stories are driving inflation around the world and these will be familiar for everyone. First of all, Russia's invasion of Ukraine. 

Audio clip: [00:02:07] Well, fierce fighting continues in the Donbass region in the east of Ukraine.

Alec: [00:02:11] Between them, the two countries are critical for global supply chains and supply a number of inputs into every industry. Russia is the world's third largest producer of oil and the second largest producer of natural gas, so critical for energy supply chains. But also, Russia and Ukraine export more than a quarter of the world's weight. And together, the two countries also accounted for about 75% of the world's sunflower seed oil. So critical and energy markets. Critical and food markets. That's the first story that's driving inflation everywhere. The second is China's COVID zero policy. 

Audio clip: [00:02:48] Health authorities in Beijing are continuing to impose strict lockdown measures as part of China's Zero-Covid strategy. 

Alec: [00:02:56] Shanghai was locked down for a while and it's home to the world's largest seaport. And after restrictions were eased in Shanghai, they're now being reapplied. And we're also seeing some restrictions being applied in Beijing because of rising COVID cases in both of those cities. Now, hundreds of ships are already waiting off China to unload their cargo. We're also seeing shipping queues in northern Europe. There's a strike in Germany at the moment. We're seeing them in the U.S. and this all this waiting at ports to unload. Lining up, waiting for your turn. It's tying up shipping containers. It's tying up ships. It's reducing capacity in the global supply chain. And that's pushing up prices for the remaining capacity. So they're the two big stories that are sort of underlying all of these inflation stories. 

Sascha: [00:03:44] Everywhere you look, there's a bottleneck when you want things to be moving smoothly. So energy prices, transport prices, food prices all being pushed up globally, and that's our baseline. So then we're starting to see unique, what you call symbols of inflation pop up in different places all around the world. So let's start with the U.S., where we've been saying a gallon of gas cost $8. 

Audio clip: [00:04:10] And $40 to fill up my van. 

Alec: [00:04:14] And crazy for people who aren't familiar with the imperial system. Don't worry about how much a gallon is. Just worry about how much a gallon used to cost in 2019. In America, the average cost of a gallon of gas 2.60. Today, the national average is $5 a gallon. So it's still doubled from pre-pandemic levels. But what set American media alight was a photo of a gas station in downtown L.A. with $8 a gallon gas.

Audio clip: [00:04:45] You're not seeing. 

Audio clip: [00:04:46] Things. Look at that, $8 a gallon for gas at a Chevron station in downtown L.A. Gas prices just keep climbing, DeMarco. Gas prices are spiking because of the war, some 6000 miles. Miles away, they jumped $0.13 overnight.

Sascha: [00:05:02] Now we know that the Russian invasion of Ukraine has pushed up oil prices generally across the world, but we're not seeing $8 a gallon across the U.S. This is kind of an anomaly in this Los Angeles gas station. So what is happening here?

Audio clip: [00:05:17] We're looking at the station here off of Alameda and ninth. Consumer watchdog saying they've never seen prices like this. 

Alec: [00:05:23] So prices of oil have been up for a while. They're almost at $120 a barrel and they've been at almost $120 a barrel or well above $100 for most of 2022. As a result, we're saying oil companies reap record profits. And there's been a bit of reluctance from these oil companies to invest in new oil production to bring more supply online. Many of their executives can see the writing on the wall about the transition away from fossil fuels. But that writing on the wall is what is pushing prices so high in California and is what has led to this $8 a gallon gas. The regulatory programmes, the taxes that are applied in California to accelerate the transition to renewables are adding to the already high price of oil and have set an oil price that has American news anchors freaking out. 

Sascha: [00:06:18] Well, that makes a lot of sense. And I'm so glad that you didn't make me understand the imperial system as well just then, Ali. So let's turn to Australia, which is one that I've been seeing everywhere. Lots of opinions, lots of opinions on cabbage at the moment coming out because apparently lettuce is costing $12 a head. 

Alec: [00:06:36] That's right. So 12 months ago, you'd be paying about 2.84 a head of iceberg lettuce in Australia. 

Speaker 5: [00:06:42] Very few would have predicted the top national concern might become the cost of lettuce.

Audio clip: [00:06:47] If you're lucky enough to get your hands on a lettuce. Well, they're about $12 each.

Audio clip: [00:06:52] Lettuce prices have soared to as much as $12 as shortages and rising costs start to bite.

Alec: [00:06:59] It's almost five x the cost in a year. We're also seeing empty supermarket shelves. We're seeing restaurants forced to take drastic steps. Now, Sascha, you mentioned cabbage. This is where the cabbage debate really heated up. KFC announced they were moving to a blend of lettuce and cabbage on their burgers. 

Audio clip: [00:07:20] Cabbage on a zinger burger just doesn't sound good, does it? 

Sascha: [00:07:23] I always thought of iceberg lettuce as a filler vegetable, but obviously for $12, you've got to make it last.

Alec: [00:07:29] Really fill a vegetable or not. Subway also captured the headlines by saying they're going to charge customers extra for iceberg lettuce if they want an iceberg lettuce. But Sascha, this story is a lot bigger than just iceberg lettuce. You could say the 11.99 iceberg lettuce was just the tip of the iceberg. 

Sascha: [00:07:49] I see what you did there. Very clever. 

Audio clip: [00:07:51] Pressure is on for supermarket chains to keep customers coming back in the face of wildly fluctuating grocery prices.

Alec: [00:07:58] So across Australia we're saying massive inflation in the price of vegetables. 

Audio clip: [00:08:02] It's not just leafy greens. Some Adelaide supermarkets are charging more than $10 a kilo for tomatoes, almost 14 bucks for cucumbers. Capsicums are also on the way up. 

Alec: [00:08:13] The Guardian had a look at some other popular vegetables and the movement in their price just over the past six months. Sweet potatoes from a dollar 88 to 4.24 a kilo. Continental cucumbers from a dollar 50 to 3.50 h brown onions from $2 a kilo to $2.90 a kilo. Celery from $3 a bunch to 4.50 a bunch. We are saying general price inflation across all vegetables. The latest consumer price index figures suggest a 12.7% year on year increase in the cost of vegetables. 

Sascha: [00:08:47] You just sounded like you are the most depressing television advert have. You know, instead of telling me about how the prices are going down, you're just listing how they're going up. So is this tied to Russia and China or are these different and unique factors at play? 

Audio clip: [00:09:02] Cost of production for fertiliser costs, wage costs, chemical costs, all these inflationary pressures are having an impact on on the ability to grow vegetables. 

Alec: [00:09:10] So this is partially tied to these two big stories that we set up this conversation with because of Russia's invasion of Ukraine. Natural gas prices are skyrocketing. They're up more than 100% in 2022. They've doubled more than doubled this year. Natural gas is an input in fertiliser, and as a result of rising natural gas prices, we've actually seen the price of fertiliser rise 120% from where it was two years ago. So fertiliser is up. Key input in vegetable farming. Oil prices are also up and we need oil to power farm machinery. So we're seeing rising input costs for farmers around the world. And the U.N. estimate that in the past year, global food prices have risen by almost a third. Fertiliser by more than a half an. Oil prices by almost two thirds. So globally was saying food price inflation because of these factors. But also in Australia, we're seeing some unique factors at play here and they really explain $12 lettuce in particular, recent floods in northern New South Wales and Queensland ruined crops that were planted but also stopped farmers planting more. Add to that we're living through one of the coldest winters in decades. So crops that were able to be planted are not growing as fast. And so we are seeing a general reduction in the amount of vegetables being supplied to supermarkets. We are also saying, again, quite uniquely Australian, a story around a labour market. So previously British backpackers made up 25% of Australia's agricultural workforce. If you wanted to extend your visa, you had to go and work on a farm. That's now changed. They can now work in hospitality or tourism as well. And there are less backpackers in the first place because of COVID. Australia's National Farmers Federation estimate that there are about 7000 backpackers that went to work in February compared to about 40,000 pre-pandemic. So this is partially tied to the global story of Russia and Ukraine, but it's also some unique local factors that have created $12 lettuce. 

Sascha: [00:11:21] It's amazing every one of these stories, I think, is going to be really simple cut and dry. And then there's so many individual factors that are going in that are creating these price hikes. So we've talked about Australia and the US. Let's take a quick break and then in a moment we're going to dig in to a story that I am fascinated by, and that is the price of fish and chips in the UK. Welcome back to the dive. I'm Sascha Kelley, your host. And I'm joined today by my colleague Alec Kinahan. And we are talking about inflation, inflation, inflation. Alec, you've given a bit of a tease. You are talking about £13 for fish and chips in the U.K., which is an extraordinarily high price, I understand.

Alec: [00:12:10] Well, Sascha, you were over in the U.K. I've actually never been. So I feel like you might be better placed to talk about the importance of fish and chips in the U.K. psyche. But based on the media that we've seen, it feels like it's pretty important. 

Audio clip: [00:12:24] I have been in this business for 47 years, and I never experience any such big increases in my in my lifetime at the fish and Chip Shop. 

Audio clip: [00:12:33] Tell us about these rising costs of your imports of fish, of cooking oil. Does that mean you're having to increase the costs, the prices that you charge? Fish and chips has been. 

Alec: [00:12:44] The staple food of Britain for the past 100. 

Audio clip: [00:12:47] Years. And today, to suddenly dilute that industry is is really worrying. 

Sascha: [00:12:52] It's so important. They used to be my Friday lunchtime meal. It was the special. And I'd always get, you know, fish and chips and mushy peas on a Friday. And it was my treat for the weekend.

Alec: [00:13:02] Do you remember how much you paid for it? 

Sascha: [00:13:03] I would have got changed from a £10 note, for sure. 

Alec: [00:13:06] Yeah, well, you wouldn't anymore. 

Audio clip: [00:13:08] So here we have. It's a box of fish and chips. A perfect partner when you're coming to the seaside on a day like today. Now, this cost each pound 50. That's up by $0.40. And just the last we can only say is that that's still not enough to cover all of his costs. 

Alec: [00:13:25] There are roughly 380 million baskets of fish and chips sold in the UK each year. Just thought I'd tell you that. 

Sascha: [00:13:33] That's a. 

Alec: [00:13:33] Lot. But importantly for this story is about a year ago the average was about £8. So you get change for a tenner, but not any more than now being sold for up to £13, an increase of over 60% in one year.

Sascha: [00:13:48] That's extraordinary. So what's driving these price increase? Is it the price of fish? 

Audio clip: [00:13:52] In just a year, the price of cod and haddock is up 75%, sunflower oil is up 60% and the badger and packaging is up around 40%. 

Alec: [00:14:02] So we mentioned at the top that Russia and Ukraine together supply about 75% of the world's sunflower oil. As this sunflower oil supply gets limited because of the war, other cooking oil gets in high demand. There's a shortage of cooking oil, Sascha, and that is driving up the price. We're also saying the price of fish and flour increasing, not great for fish and chips. So again, this is a story of shortages globally. And as a result, this is what has captured British headlines. Potentially one third of the country's 10,000 fish and chip shops could close in the next nine months. 

Audio clip: [00:14:38] Right now, we are living life on the on the edge and we are holding in our hands and please, please help us. And you just can't help. I hope that our chancellor is listening. It really is a critical point. 

Alec: [00:14:48] Now, Andrew Crook, president of the National Federation of Fish Fry, is in the UK, said that monthly expenses for cooking oil alone have risen by more than £500 since Russia invaded Ukraine.

Sascha: [00:15:00] That's extraordinary and it's such a fabric of British society as well. I can completely understand why this is causing a media storm. 

Alec: [00:15:09] It's got so dire in the UK that grocery stores have now limited the number of bottles of sunflower oil that people can buy. On top of that, we're talking about fish and chips and a lot of British fish actually comes from Russia and the UK Government have announced a 35% tariff on Russian whitefish, which is forcing the price up. 

Sascha: [00:15:29] And fish and chips are historically an affordable, family friendly food option. You know, they're not it's not high dining. It is supposed to be something that you enjoy as a cheap option on a Friday night. So I can completely understand why this has caused havoc for so many people. So, Alex, in today's episode, we've touched on three potent symbols of inflation around the world. We've got $8 a gallon of gas in America. We've got $12 heads of iceberg lettuce here in Australia and £13 of fish and chips in the UK. When is this going to end? I cannot afford it. 

Alec: [00:16:02] Well, Sascha, I've got bad news. There's nothing to indicate that this will be over soon. Many of the inputs into the global economy still remain high. Energy prices remain high because of Russia's invasion of Ukraine. Food prices remain high because of the same reason the cost of transport is high because of China's lockdown and the incredibly tangled and backed up supply chain. And we're seeing the result of that in inflation numbers. America last Friday released their inflation numbers. It came in at 8.6% for the year and that surprised most economists. They didn't expect it to be that high, which the number isn't great, but also the fact that people were surprised. Also not a great sign. So. Sascha. Unfortunately, we've likely got some more of this inflation story to play out. 

Sascha: [00:16:52] Hopefully it's not $24 heads of Ashton now looking forward to.

Alec: [00:16:57] I think inflation will be the biggest story for the economy this year. So expect to hear plenty more about it on the dive. 

Sascha: [00:17:04] Excellent. And if you've got any questions about inflation, then get in touch with us. The dive at Equity Mates WSJ.com is our best email address and we love to dig into some of the questions that you have. If you want to talk to us about anything else, then do get in touch or follow us on any of the social media channels. All those links, as always in the show notes below. Remember to give us a five star rating in your favourite podcast app. We love it when you go and review us and subscribe so that every time there's a new episode it's right that you don't have to go searching for us. I like. Thanks so much for joining me today. 

Alec: [00:17:36] Thanks, Sascha.