If everything is more expensive, where is the money going?

[PriamFarrl]

Everything is costing more right now, food, energy, resources, everything; but, peoples wages aren’t going up. So where is the extra money I’m paying going? Who is getting the extra 10p my loaf of bread costs?

Well the manufacturers have got increased production costs (electricity prices for one) and increased delivery costs (increases in fuel prices).

I wish I could explain this. I consider myself an intelligent person but economics turns my brain to mush

You need to ask why food prices are going up. Increasing labour, energy, and transportation costs are behind the majority of increases. This is alongside production difficulties caused by severe weather conditions. These rises are all being passed to shoppers.

Arable farmer here. The 10p you've paid more for your bread will be split between a number of different thing.

Supermarkets costs are rising, energy and staff etc.

Processors costs are rising.

I get paid more for the wheat. But that is swallowed up by paying for diesel to go in my tractor and next years fertiliser.

hth.

It’s all underpinned in energy costs pretty much, everything costs more to produce - for food, fertiliser uses enormous amounts of gas to produce and so the price of it has skyrocketed, so farmers have to get the money for that - or they use less but then that reduces yields, so puts the price of grain uo anyway because there’s less of it.

A few places.
Into the pay of workers who are being paid more to produce things as companies have had to increase salaries to recruit.
A bit to shareholders of utility companies charging more for fuel.

War in Ukraine means that Russia is selling less gas etc so there is less available and therefore people will pay more to be the ones that get it. This knocks the whole way down the supply chain.

for railways - the fares have increased in line with inflation but wages haven’t. The money is going into the pockets of shareholders and highly paid senior management. Some of the big rail companies are subject to private equity takeovers - which is where a small group of rich people borrow money to buy big companies and take as much money as they can out of it.

so it’s different for different sectors. The impact of the war is a bit of a different thing - but basically the money is going to rich people. Who themselves of course have to pay inflated prices - but they are overall better off.

I don’t agree with some of his positions - but mick lynch is wonderfully clear on some of these issues

I get that basically it comes down to energy prices. But who is getting that money?

Ultimately the energy extractors @PriamFarrl hence why people like BP are making enormous profits.

And to be fair there is a level of complication in that many peoples pension funds have big shareholding’s in some of the companies who are making lots of money. And to. E fair these won’t all be rich people. So it was a bit too sweeping of me to say that it’s only rich people benefiting. But it mostly is.

it’s basically a significant failure of the theory of regulating markets means greater fairness in the allocation of limited resources.

What I don’t understand is why energy prices rising has led to energy companies making more profits?

if the cost of beef goes up, it doesn’t mean McDonalds are celebrating. So why does energy price rises mean boom time for the likes of Centrica?

Oil company profits:

https://amp.theguardian.com/business/2022/aug/02/big-oil-profits-energy-bills-windfall-tax

Many reasons:
It’s not due to Russian gas or the War in Ukraine that’s a convenient political ploy to blame Putin. The UK only uses 3% Russian origin gas. There is a shortage of global supply to meet post pandemic rebound of demand. Asia is also got higher demand than usual too. So if anyone thinks ending the war in Ukraine will lower gas prices, they’re fantasising.

Crude oil is at 2018 prices, so there’s no good reason for petrol prices to be 30% higher than they were in 2018. Profiteering is definitely going on. But also our postBrexit deal for buying crude oil is less favourable than it was in the EU so we are paying higher wholesale prices as a result.

What I don’t understand is why energy prices rising has led to energy companies making more profits?

Its the wholesalers are raking it in because global demand is outstripping supply. These costs then get passed on by the retailers (utility companies) to the consumers.

@Discovereads oh that’s interesting- does less Russian supply though mean that there is more competition for other supplies?

did production reduce notably during the pandemic - ie why hasn’t it just reverted to same rough level of supply and demand as there was pre pandemic?

Money is a make believe thing, as unstable as a house of cards.
I'll never understand the complexities.

Yes production reduced during the pandemic and hasn’t recovered yet.
Also wholesale prices for energy- gas, crude oil, petrol went down to record lows during the pandemic due to more supply than demand. Many countries took advantage of the low prices and bought and stored the gas/oil for future use.

But the U.K. government like idiots got rid of it’s energy storage capacity- closing down most of it in 2017. We have only have the ability to store 4-5 days worth of gas for example, or 1% of the entire capacity of Europe. So we cannot stock up when prices are low so are hit worse than other European countries when prices climb steeply.

But lack of storage is only a minor contributor to the problem. That’s why is a many reasons, perfect storm type of situation.

@Discovereads you sound knowledgable. What’s your predictions for going forward?

Im not much good at projections, but I think we are going to go from bad to worse as the two choices of next PM are very bad or bad.

Liz Truss has a huge lead over Rishi Sunak in the polls to be the next PM but she is economically illiterate. Everything she has promised to tackle the economy is the exact opposite of what one should do to reverse inflation, wage stagnation and the resultant cost of living crisis. She’s literally saying she’ll throw kerosene on the fire and even when this is pointed out to her, she just doesn’t get it. She even said she’d tackle the winter by releasing our North Sea gas storage.,,whoop de dooo..that’s a 4-5day supply so is like a drop in a bucket. If she becomes PM and implements her promises we could end up in a serious debt crisis with hyper-inflation and become recipients of world aid.

Rishi also would be a terrible PM but he is at least economically literate and could tackle the inflation and so on, so I know he can get the economy going again. But he’s no friend of the people. He will tackle it but in such a way to get the economy geared to increase inequality- get money flowing back to the pockets of the rich and just toss a few table scraps to the suffering masses. So he’d be good for the economy, but not the average person. He won’t care about millions more in fuel or rent or food poverty. He will be focused on propping up real estate values, keeping businesses afloat, siphoning “level up” money from working class areas to already affluent areas that don’t need it. It will be close ranks and take care of our own (the wealthy) while the rest will have to experience austerity on steroids to make things right.

I don't know where it's going except out of my wallet

Well we will all find out when the supermarkets post their yearly profits soon, Tesco made £2.5bn last time round, 65% up on the previous year.

Shell announced profits of $40bn today... double what it made last year.

So there is your answer OP.

There's been some enormous profits announced by energy companies lately OP. If the money isn't going on increased wholesale costs it is just going into company coffers.

I was speculating to DH this morning it's just tax by the back door. Company profits go up exponentially, government slaps on a windfall tax, government gets extra taxes- to pay for pandemic, energy help etc...

I'm just a teaching assistant, not economist though!

the thing to remember (but then forget, so you don't go mad) is that money doesn't really exist in any real sense. capitalist society functions because we all agree to pretend it exists. businesses operate on credit borrowed from banks who don't actually have any physical money but have enough reputation that we trust that when they say "I am lenting this business £1000000" then that in some sense "creates" £1000000 that didn't exist before. but this can only work combined with rigorously enforced interest rates otherwise it would be too easy to magically create an infinite number of millionaires and the money would be effectively worthless because part of the point of money existing is to mediate between mismatches of supply and demand, so that if something is desirable to everyone but there's only enough of it for 10% of people to have it, it is priced so that only the richest 10% can afford it.

higher interest rates restricts the flow of money and means that businesses have to charge more for their products, so things get expensive, workers demand higher wages, businesses have to borrow more to pay the higher wages, and the banks have to put interest rates up to stop this creating a death spiral of hyper-inflation.

it's a very tricky balancing act. if the economy is well balanced, businesses produce just enough value-added goods and services to make enough money to service their debts at a moderate interest rate, pay their workers just enough that the workers can buy what they need, and prices stay stable with moderate inflation. but there's lots of things that can throw this out of balance

Just read your post of 5/8, @Discovereads , excellent foresight. If you have time, it would be good to know your current views.