Ghost of Inflation Past: How 2021 became the year of high prices

Scrooge and the Ghost of Christmas Past fly over the town
Illustration from Charles Dickens' A Christmas Carol: Scrooge and the Ghost of Christmas Past fly over London. Source: Getty

Last Christmas.... so sang the late George Michael in the 1984 Wham! chartbuster hit, which has since become an evergreen pop number on myriad radio stations come the festive season.

This Christmas... quite a few things are hitting high. Fuel, food and the lot. Most gifts too.

Prices have surged. Inflation has got many worried, and not just consumers. Economists, analysts, bankers, strategists, policy makers, from the International Monetary Fund to central bankers, and investment banks, inflation has been a key theme. It has tapered stimulus and pushed interest rates out of their historic lows.

The analysts at Deutsche Bank, however, have attempted to add a festive flavour to it with a quirky take on 'The 12 days of Christmas' carol, linking inflation to prices of goods and services in the post-pandemic, or rather recurring pandemic year, as Omicron re-scars the national and global psyche, threatening to kill a nascent recovery and resurrecting the ghosts of the Christmas past.

In August, Bank of England governor Andrew Bailey warned inflation could hit 10-year-high of 4% in the final quarter of 2021. Right on cue, the Office for National Statistics published its latest stats last week showing UK inflation had hit 5.1%. A day later the Bank raised interest rates from record lows of 0.1% to 0.25% for the first time since the start of the pandemic.

The IMF too had warned the UK in its report, also published last week, to avoid 'inaction' saying it expected inflation to peak at about 5.5% in the spring of 2022 and that prices would rise further.

Watch: What is inflation and why is it important?

“2022 is a year of change, but not in a good way. Most of the financial developments in the pipeline will leave us worse off by the time we struggle to the end of 2022. The tax rises announced around the Budget will kick in, along with higher prices for everything from energy bills to rail fares and pub prices," said Sarah Coles, senior personal finance analyst, Hargreaves Lansdown.

Deutsche Bank expects inflation to peak around 6% in April, with annual inflation stuck around 5% for the next three quarters.

That means less bang for your buck. An expensive festive season and New Year beckons. Here's what Sanjay Raja, chief economist at Deutsche Bank, and strategists Shreyas Gopal and Panos Giannopoulos reckon how much the classic '12 days of Christmas' has risen in cost.

1. A partridge in a pear tree, or poultry

Shy mountain hill birds
Poultry prices are marginally up in the UK. Photo: Getty

Perhaps unsurprisingly, there seems to be a supply issue when it comes to availability of partridges. While it's difficult to fully disentangle the impact of COVID and Brexit on the supply of partridges, Deutsche Bank team instead substituted this classic item with 'poultry'. The good news is that poultry prices are up "only" 1.5% year on year (YoY) in the last three months. "The bad news is that until this year, poultry retail prices have been in decline (annual price growth) for the better part of the last seven years."

2. Two turtle doves, or pet goods and services

Turtle Doves
Turtle doves. Photo: Getty

DB team has taken the loose interpretation of proxying turtle doves via pets goods and services. Recently, pet goods and services prices are running over 3% YoY – the highest annual inflation rate since 2012.

3. Three French hens, or imported food

Frech hen
Food import prices from the EU are down 2.1% year on year. Photo: Eddie Keogh/Reuters

"If there's some good news to have this winter, it's that food import prices have actually fallen, relative to around this time last year." Food import prices from the EU are down 2.1% YoY between August and October. For now, Brexit price pressures have yet to filter through into imported food prices, according to Deutsche Bank.

Inflation charts. Source: Nomura
Inflation charts. Source: Nomura

4. Four calling birds, or telecoms equipment and services

Prices for calling birds have very little time-series data, says the DB team. So instead, they've looked at communications equipment and services. "Fortunately, telephone equipment and services prices have been broadly stable heading into Christmas. This means communicating with friends and family won't be much more expensive than normal and are up 1.3% YoY (on average over the last three months)."

Read more: London Stock Exchange: Year in IPOs

5. Five golden rings, or jewellery

Gold rings
Gold retains it's safe haven appeal. Photo: Kim Hong-Ji/Reuters

Gold prices have been on a bit of a roller coaster journey this year. According to the ONS, jewellery prices are up 2% 3m/YoY. While this seems modest, in 2020, jewellery prices were averaging only 0.6% YoY and were actually falling by 0.5% YoY in 2019 so a modest, but still meaningful shift up in prices, according to the DB team.

The UK's Royal Mint said it has experienced a surge in sales of gold. Karina Hicks, head of precious metals marketing at the Royal Mint, said: “As the run up to Christmas is traditionally a quieter time for investing, it’s very positive to see that demand for Gold has continued, with 30th November also being our second busiest day of the financial year so far in relation to number of precious metals transactions.”

6. Six geese a-laying, or eggs

Price of eggs have risen this year. Photo: Gett

Food prices are predicted to rise further in 2022, with no easing of supply chain woes and inflation predicted to hit 6%.

In the last three months, the price of eggs is up 2.2% YoY – that's relative to an average -1% YoY registered going back to January 2018. There's clear upward pressure for farmers, the DB team says. In Q2, the average UK farm-gate egg price went up 13%, and it's likely that the near-term trend remains skewed to the upside.

Read more: Revealed: Best performing funds and trusts of 2021

7. Seven swans a-swimming, or recreational and sporting services

Gym and fitness club prices are expected to go up too. It's going to be hard to swim with the rise in recreational and sporting services prices. The three months/YoY rise stands at just under 4% compared with the average of 2.7% in 2020, according to Deutsche Bank analysts.

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8. Eight maids a-milking, or where households are employers

Since the pandemic began, wages where households are employers (which include domestic cleaners) are up 6%. And over the last three months, wage inflation sits just under 3%. Wages for maids are likely to rise with the forthcoming increase in the national living wage, which is due to rise by 6.6% next April, said the DB team.

However, while the jobs market is healthy, workers have not seen the pay surge that some – including the prime minister – had envisaged, as wage growth has ground to a halt.

According to the Office for National Statistics, nominal wage growth (excluding bonuses) fell from 4.1% in September to 3.8% in October as the measurement effects of the pandemic receded and the hiring surge ended. Median nominal pay was flat in the two months to November.

"With inflation forecast to peak next May, and no evidence yet of pay rises responding to higher prices, the UK’s third real wage squeeze in just a decade is likely to last for at least the first half of 2022," said Nye Cominetti, senior economist at the Resolution Foundation, a think tank.

“The UK has entered a tough new phase of the crisis with plentiful jobs but shrinking pay packets."

Watch: IMF tells UK to be ready to redeploy furlough if 'widespread' closures needed to tackle Omicron

9. Nine ladies dancing, or arts, entertainment, and recreation

The leisure industry took a big hit during the pandemic. But wages are up, according to HMRC PAYE data. Arts, entertainment, and recreation wages are up over 6% since the pandemic.

However, it remains unclear just how tight the UK labour market is, and thereby the implications for wages going forward. "On the one hand, employment (payrolls) is back at pre-pandemic levels, vacancies are particularly elevated. On the other hand, hours worked remain below their peak and there were half a million more inactive people in Q3 2021 than there were in Q1 2020," according to Nomura.

10. Ten lords a-leaping.

But they aren't leaping for joy. The Independent Parliamentary Standards Authority is likely to recommend a 2.7% increase in the daily allowance for peers from April next year. As per Deutsche Bank's updated forecasts, that will amount to a real wage cut of over 3% for the House of Lords.

11. Eleven pipers piping, or tobacco

Participants in costume pose during the Chap Olympiad event in London. Photo: Neil Hall/Reuters
Participants in costume pose during the Chap Olympiad event in London. Photo: Neil Hall/Reuters

Tobacco price has increased 6.7% over the last 12 months, the largest increase since early 2019.

The combined prices of alcohol and tobacco rose by 2.6% this year, compared with a fall of 0.2% a year ago, leading to an upward contribution to change of 0.10 percentage points., according to ONS data. The largest effect came from tobacco, where duty rates increased as announced in the Autumn 2021 Budget.

12. Twelve drummers drumming, or recording media

Musical group playing in night club
Musical group playing in night club. Photo: Getty

Labour shortages have meant that the market for drummers has dwindled, making it extremely difficult to track. Instead, Deutsche Bank analysts have included the price for recording media. Unfortunately, prices for 'reception and recording of sound and pictures' is tracking at near record highs, with annual price growth close to 7% YoY, they said.

Watch: Will interest rates stay low forever?