Food costs for the eurozone’s customers are set to proceed rising at near-record charges for a minimum of one other yr, regardless of the area’s massive agriculture business, based on a report by the European Central Bank.
The EU produces extra agricultural merchandise than it consumes. But this has not insulated Europe from the surge in meals costs that has swept throughout a lot of the world, pushed by hovering gas and fertiliser prices for farmers and the influence of Russia’s invasion of Ukraine on provides of key merchandise.
Food costs within the 19 international locations that share the euro rose 7.5 per cent within the yr to May, an all-time excessive for the reason that single foreign money was launched in 1999. Annual meals inflation is greater within the US and UK, however costs have been rising quicker within the eurozone over the previous three months.
The ECB mentioned in an article from its month-to-month analysis bulletin printed on Tuesday that meals inflation was “expected to stay high in the coming months, despite some counterbalancing factors”, similar to elevated home manufacturing or a change to different sources.
Pointing to a surge of greater than 40 per cent within the farm gate and wholesale costs of meals within the eurozone, the central financial institution predicted that additional “price pressures will affect euro area consumer food prices through the pricing chain in the coming months”.
The hovering value of fertiliser, which rocketed 151 per cent within the EU within the yr to April, meant meals costs would proceed to surge in 2023, the central financial institution mentioned.
Monetary policymakers would usually look previous short-term rises in meals costs as a supply-driven supply of inflation that they’ve little affect over. But if meals costs hold going up, individuals’s expectations that prices will proceed to spiral may develop into entrenched. Consumers are extra delicate to sharp will increase of their weekly meals invoice, as a result of it’s extra simply noticeable than different prices.
Jennifer McKeown, head of worldwide economics at Capital Economics, mentioned policymakers “no longer have the luxury” of dismissing meals inflation, “particularly since food prices are so visible and influential on the inflation psyche”. She forecast that if agricultural commodity costs saved rising it might minimize client spending in superior economies by 0.7 per cent.
The ECB introduced this month that it might start elevating charges in July in a bid to fight inflation that, at greater than 8 per cent, is now 4 occasions policymakers’ purpose of two per cent.
The invasion of Ukraine, referred to as “the breadbasket of Europe”, has vastly lowered the nation’s exports of wheat and corn in addition to sunflower oil. The warfare additionally hit provides of fertiliser from Russia and potash from Belarus.
The ECB mentioned Ukraine, Russia and Belarus solely accounted for a mixed 2 per cent of the meals and fertiliser imported into eurozone international locations in 2020. But it added that the bloc nonetheless relied closely on the availability of sure merchandise from the three international locations, similar to maize, which is used extensively for animal feed, sunflower oil and fertiliser.
Disruption to the provides of fertiliser or maize have been prone to push up the value of many different meals merchandise by elevating prices for farmers, the central financial institution mentioned. Alternative provides of those merchandise could be costlier, it added.
“Households may substitute sunflower seed oil with other vegetable or animal oils and fats, but it is also used in a number of processed food products, so the reduced supply has a large impact,” it added.
In the Baltic states and Finland, which rely extra closely on Russia, Ukraine and Belarus for agricultural and fertiliser imports than most eurozone international locations, meals inflation has been properly above the bloc’s common at between 12 and 19 per cent.
Even if meals producers purchase their substances from home farmers or these in different eurozone international locations, they’ll nonetheless should pay extra because of the surge in world costs for a lot of agricultural commodities and sharply greater vitality and fertiliser prices for farmers, the ECB mentioned.