Consumer food prices in the euro area have been rising for over 2½ years, with a marked acceleration over the past 18 months taking the annual pace of food price inflation to a record high this year. This note analyses several aspects of recent food price trends in and across the zone, and sets out some observations about their future prospects.
The level of food prices in the Eurozone dipped slightly over the course of several months in 2020 during the early stages of the pandemic. Having bottomed in September 2020, the subsequent increases were modest at first, but prices started to run higher than the pre-pandemic trend from late 2021 onwards from which point the upward pressure intensified dramatically. Food prices already faced upward pressures prior to Russia’s invasion of Ukraine, but these pressure intensified following the invasion as the war and its repercussions have hindered imports of energy and food commodities in the euro area and contributed to higher global prices.
The result is that the cumulative increase from the September 2020 low now stands at 26 percent, with the level of prices in April this year (the latest available) running almost 20 percent higher than the extrapolated pre-pandemic trend.
As with many Eurozone economic indicators, the aggregate picture across the zone masks considerable variation in the trends evident across member states. In particular, the extent of the uplift in prices from the zone’s September 2020 low point has varied from as high as 55 percent in Lithuania to the 17 percent increase recorded in Ireland. One particularly striking feature of the cross-country analysis is that it reveals that the Baltic states have faced exceptionally intense price pressures: Estonia and Latvia have also recorded price surges of in excess of 40 percent over this period reflecting their much higher dependence on imports of agricultural products and fertiliser from Russia, Ukraine and Belarus.
The major upward pressure on food prices in the zone has resulted in a dramatic acceleration in the pace of annual food price inflation. An unprecedented run of 18 consecutive monthly price increases saw the annual rate of food price inflation soar from marginally negative in April 2021 to a record high of 17.9 percent in March of this year – more than double the pace of the previous high of 7 percent recorded in mid-2008. Again, cross-country divergence was a notable theme in the March readings, which ranged from 5 percent in Cyprus to over 25 percent in Lithuania and Estonia as the Baltic states (and Slovakia) continued to experience particularly marked inflation pressures.
One notable consequence of the major acceleration in food price inflation is that it has become an increasingly important driver of overall headline HICP inflation in the zone. Reflecting the combination of the strength of its price growth and the weight of food in the HICP (at just under 15 percent of the total index in 2023), the contribution of food price inflation to the overall inflation rate jumped from zero in April 2021 to a recent high of 2.7 percentage points in February of this year. In fact, analysis of a 40-item breakdown of the HICP shows that since January of this year food prices have become the single largest contributor to headline inflation in the zone, as easing price inflation in energy categories (notably Electricity, Gas & Other Fuels and Operation of Personal Transport Equipment) has left food prices as the dominant driver. On the latest figures, food price inflation alone accounts for one-third of the overall headline inflation rate of 7 percent in the zone as its contribution amounts to 3.5 times that of the next largest contributor (Electricity, Gas and Other Fuels).
Eagle-eyed readers will observe that the above graph shows that the contribution of food has eased in the very latest observation. This reflects the fact that the April figures brought some indication of a cooling in food price pressures. This came in the form of prices which were unchanged in April which in turn led to a deceleration in the annual rate of food price inflation from its record March pace of 17.9 percent to stand at 15.1 percent last month.
With the April figures bringing a halt to an unparalleled sequence of monthly rises and the first non-trivial deceleration in the annual pace of food price inflation in two years, can we take this as a signal that the current episode of food price inflation in the euro area has potentially passed the point of peak intensity?
Several considerations indicate that food price inflation in the Eurozone has now indeed likely peaked.
Firstly, analysis of price developments across member states shows that the deceleration at the overall Eurozone level was broadly based across countries. Virtually all members states (all bar Cyprus, the country with the slowest pace of food price inflation) recorded a moderation in their respective annual price inflation readings last month. This indicates that the deceleration in the aggregate measure for the euro area as a whole is not simply capturing movements in a selection of individual countries, but rather is fully representative of developments across the wider zone, thus lending validation to the quality of the signal from the aggregate measure.
More fundamentally, analysis of several key gauges of pipeline food prices is now clearly pointing to a prospective further easing of final consumer inflation pressures. Notably, looking at measures of food commodity and farm-gate prices reveals that their levels peaked in the second and fourth quarters of last year respectively. This has resulted in a major downshift in the associated annual rates of price change, which have plunged from over 40 percent at peak last year to sub-zero in April this year in both cases. A bit further along the food price chain, producer price inflation is also now easing. Having decelerated for 5 consecutive months, the latest reading (for March) shows an annual increase of 16 percent, down from its peak last October of 22.6 percent.
Analysis of the historic correlation patterns of the respective annual growth rates points to a typical lag of around 1-2 quarters in the passthrough from commodity and farm-gate prices to producer prices, and about a further one-quarter lag from producer to consumer prices. The historically anomalous nature of the current bout of price pressures means there is higher-than-normal uncertainty around the timing and extent of the pass-through in operation at present when it comes to the transmission of pipeline developments to final consumer prices for food. And there clearly also remains elevated uncertainty about important fundamental food price drivers, including and especially on the supply side (e.g. the risk of further adverse developments in the areas of weather and energy, fertiliser & other food production inputs). But overall, it is increasingly clear from the available evidence that a marked softening in early-chain food price pressures in the euro area is well underway.
The conclusion is that, barring further major adverse shocks, it looks highly likely that consumer food price inflation is now past its peak in the Eurozone. Current trends in pipeline price metrics tell us to expect a notable softening of consumer-level price pressures in coming months and quarters. This is a prospect that is reinforced by supportive base effect arithmetic linked to the hefty 1.2 percent average monthly increase in consumer prices chalked up between May and December last year. The nonrepeat of such strong monthly increases will likely help underpin the establishment of solid downward momentum in the annual pace of consumer food price inflation in the months ahead – a scenario that would undoubtedly be very welcome from the perspective of both beleaguered households across the zone and policy makers at the ECB.