The knock-on cost of pricey commodities

Inflation is the word on everyone’s lips at the moment. RPI inflation – the measure that best reflects the true rise in the cost of living in the UK – is now at 5.1 per cent a year as producers raise prices to protect their profits. But even the biggest brand owners are struggling to pass on costs quickly enough, and the market is growing nervous. Spread betters should a wary eye on the sectors under pressure.

Certainly, no results announcement from consumer facing companies lately has come without a health warning over input cost inflation. So far, the market hasn’t much liked what it’s heard, and you get the sense that the worst is yet to come. Irish food giant Kerry said in its recent results that it expects input cost increases of 8 per cent next year, more than twice the current rate of CPI.

For those companies looking to claw back rising costs directly from consumers, it won’t be easy. Households simply don’t have much more capacity to absorb further impositions on their budgets. The CBI warned that high street sales were weaker than expected in February, blaming higher prices for the dampened demand.

So while the likes of Next, M&S, and Debenhams have all said they’ll be putting up prices next year, there’s every risk that could hit sales volumes. “We believe rising input costs have gone well beyond the ability of apparel retailers to pass them on,” said Simon Irwin at broker Liberum.

It’s not just retailers that are up against the wall – beverages group Britvic shocked the market when it said it would be unable to claw back “a rapid and unprecedented uplift in the cost of key raw materials”. Even household goods giants like Reckitt Benckiser and Unilever are finding that their mighty brands aren't a sure-fire guarantee that shoppers will keep buying their products if they push up prices.

Whether there’s still an opportunity for traders to take advantage from the squeeze on consumer goods companies is another matter – short interest in general retailers, for example, is already running at absolute highs, according to broker Espirito Santo. “It feels as though we are fighting an ever-increasingly difficult battle to persuade investors that declining consumer confidence will reverse,” said its analysts.

And, even if valuations of consumer facing companies are approaching rock bottom levels, as long as uncertainty over the scale of commodity inflation continues, it is probably not worth swimming against the tide of negative sentiment just yet.