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Food inflation continues its ascent

Food manufacturers are raising prices due to higher costs, but food inflation levels vary considerably between countries. Some EU consumers are already looking for cheaper options in supermarkets. The longer food companies continue to raise their prices, the higher the chance consumers eventually trade down.

There are many reasons why food prices are rising...

Global food demand continues to be strong but the supply side is going through turmoil because farmers across the world have seen their input costs go up. How much these input costs have risen is very dependent on the region and the type of crop the farmers cultivate or the type of animals they rear. Data on Dutch farming shows that energy and fuel, and fertiliser and crop protection have seen the biggest price increases. Further down the supply chain, food manufacturers have been facing higher prices across a variety of important inputs, ranging from agricultural commodities and food ingredients to packaging, energy and transportation. While direct energy use is usually only a small share of total costs for food manufacturers and retailers, higher energy prices still trickle down to them through the food products and transportation services that they buy.

Non-Western countries are hit hardest by food inflation

This isn’t good news for consumers, especially in non-Western countries. Out of the G20 countries, Turkey and Argentina have the highest levels of food inflation with food prices rising by 60-70% in March, slightly above general inflation in these countries. According to national statistics, food prices in countries like Russia, Mexico and Brazil rose by 10-20% in March. Food inflation and the availability of food are a particular threat to conflict zones and countries in the Middle East and Sub-Saharan Africa. Here, households spend a relatively large share of their income on food, making them more vulnerable to increases in food prices. Price isn't the only issue – supply disruptions due to the conflict in Ukraine and export restrictions can also pose problems for the general availability of food.

Food inflation hasn’t reached a turning point yet

General inflation surged to 7.5% in the eurozone in April, mainly due to a shock in energy and transport prices. While inflation is expected to fall towards the end of the year due to a slightly lower contribution from energy and fuel, we do expect average inflation for 2022 to remain above 6%. Since wage growth has barely increased, this is causing a fierce squeeze in purchasing power for Europeans. The contribution of higher food prices to general inflation has been increasing lately and we expect food inflation to hover around 6% in the second half of the year in the eurozone. This corresponds with business surveys which indicate that selling price expectations from EU food manufacturers are heading higher. This is echoed by major food producers such as Nestlé, Unilever and Danone which recently communicated that they continue to raise prices to defend margins.

Read the full article on ING Think