Rising cost of food defies inflation slowdown

Food prices are soaring, particularly in Europe, as producers and retailers try to maintain or increase their margins.

• In March consumer price inflation started to ease in Germany and the US. Germany’s consumer price index (CPI) increased by 7.4% year-on-year, down from 8.7% in February, while the US inflation rate of 5% in March was the lowest since May 2021. Data from France will probably show a similar trend as the impact of higher interest rates on consumption starts to take effect.

• However, food prices remain largely immune to the inflation slowdown, particularly in Europe. The food, beverages and tobacco component of CPI rose by 22.3% year on year in Germany in March, following similar growth in January and February. In Poland and other eastern EU members, annual food price inflation has been even higher in recent months. US food inflation is lower, at 8.5% in March, but it continues to outpace overall CPI. 

• The rise in food prices comes despite recent declines in the global prices of key food commodities. EIU’s food, feedstuffs and beverages (FFB) price index soared by 22% in 2022 as the war in Ukraine fuelled price spikes for fertilisers, grains and other foods. However, prices for food commodities have decreased in recent months and we expect the index to decline by 10.5% in 2023 as global supply-chain concerns ease.

• The mismatch suggests that, having initially swallowed the impact of higher commodity prices, food producers, wholesalers and retailers are now passing on the costs to customers. This will help them to maintain (or even increase) sales values and margins even as sales volumes fall. This trend has led to rapid gains in share prices for agrifood companies, with the FTSE 350 index for food and drug retailers doubling to record highs on April 11th.

• European governments are trying to address this issue, which is fuelling social discontent. In March the French government responded to February’s high food inflation by striking a deal with retailers to cap prices for some basic food staples. However, we believe that this will not affect pricing strategies significantly. Comparison of the food price indices for producers, importers and consumers in France suggest that food producers have been raising prices more rapidly than retailers, generating substantial profits as commodity prices fall.

The analysis and forecasts featured in this piece can be found in EIU’s Country Analysis service. This integrated solution provides unmatched global insights covering the political and economic outlook for nearly 200 countries, helping organisations identify prospective opportunities and potential risks.