Opinion: Food inflation remains stubbornly high in the US and Europe

The rate at which food prices rise is important not only because it has a direct impact on household budgets, particularly for those at the bottom of the income scale, but also because the visibility of Changes in food prices help shape the public’s inflation expectations, which can itself contribute to higher inflation.

Annualized food inflation is now 8.8% in the United States and the eurozone, compared to an average of 1.6% in the decade before the pandemic.

Facts:

Global food prices began to rise in mid-2021, but the war in Ukraine has exacerbated these trends through its impact on commodity prices. The FAO Food Index, based on average commodity prices for meat, dairy, cereals, vegetable oils and sugar, has risen 60% since the start of 2020, making fear an increase in hunger and poverty, especially in the least developed countries.

Much of the increase in food prices has passed through to retail prices in many countries around the world. We are able to follow the daily evolution of the prices of food products sold online in a group of 23 major countries and see that the retail prices of these products have increased by an average of 5% in the first five months of the conflict. (Countries included in the data are: Argentina, Australia, Brazil, Canada, Chile, China, Colombia, France, Germany, Greece, Ireland, Italy, Japan, Korea, Mexico, Netherlands, New Zealand, Russia, Africa South, Spain, Turkey, United Kingdom, United States and Uruguay.)

Food inflation has started to moderate in the developing world.

Econofact

The trajectory of food price inflation differs somewhat for the United States and the euro area compared to developing countries (see chart). Developing countries were immediately affected by the war. Daily food price indices constructed with online data show that retail food prices in the middle-income countries included in the sample quickly began to rise at a higher rate, jumping more than 4% in just two months after February 24, 2022, the day Russia invaded Ukraine. As consumers in less developed countries spend a higher share of their income on food, the impact of rising food prices has been significant and is already causing economic and political instability in countries like Argentina. and Sri Lanka. (Food costs represent 17% of consumer spending in advanced economies, but more than 20% in Latin America and emerging Asia and 40% in sub-Saharan Africa.)

Although it remains higher than at the start of the pandemic, food inflation has started to fall for the emerging economies in our sample, in line with the drop in food commodity prices in recent weeks.

By historical standards, the rise in food inflation has been greater for developed countries. Annualized food inflation is now 8.8% in these countries, compared to an average of 1.6% in the decade before the pandemic. And, while food inflation showed declines in the most recent data for emerging economies, it remains stubbornly high for the US and Eurozone continuing to rise at a rate of over 1% per month. .

Food shortages have increased again.

Econofact

One of the reasons for more persistent food inflation in developed countries may be the persistence of supply disruptions and food shortages that began with the pandemic. The pandemic has disrupted the flow of goods along international supply chains, increased the cost of domestic business operations and undermined retailers’ efforts to manage inventory. These difficulties could lead to higher production costs, difficulties in restocking and product shortages, and lead to retailers passing the costs on to consumers in the form of higher prices (see here).

While shortages of most categories of goods have declined from their pandemic highs, food shortages have increased again in the United States since September 2021 and remain abnormally high, with more than 60% of food varieties pre -pandemics remaining out of stock or discontinued. , a level close to the peak at the start of the crisis (see chart below).

Differences in fuel price controls could also contribute to the divergence in food inflation trends between developed and emerging economies. Fuel prices influence food inflation because transportation costs represent a significant portion of the total cost of producing food sold in retail markets. The war has resulted in a more dramatic and persistent increase in fuel prices at the pump in developed economies compared to many developing countries where retail fuel prices are heavily regulated and therefore have not increased significantly over the past few years. first five months of the war. Although they have stabilized in recent weeks, fuel prices in developed economies are still above pre-war trends.

Food prices are important not only because they form a large part of most consumers’ consumption basket, but also because persistent levels of food inflation can lead to higher inflation expectations and possibly contribute to an upward spiral of inflation. How people think prices will behave in the future plays an important role because inflation expectations can sometimes become self-fulfilling. Workers who expect to face higher prices for the products they buy may demand higher wages, leading to higher production costs and higher product prices, for example.

A growing body of research reveals that consumers often rely on a few key products they consume on a regular basis to extrapolate changes in the overall cost of living (see here). Research finds that consumers who experience extreme changes in grocery prices are more likely to base their inflation expectations on those changes than those who see little or moderate changes in grocery prices.

What does that mean:

The pandemic and the war in Ukraine continue to put significant pressure on global food inflation. These price hikes have already caused unrest and political pressure in many countries and could contribute to a persistent increase in inflation expectations. The pressure is shifting to advanced economies, which are experiencing levels of food inflation that are worse by historical standards. These trends show few signs of slowing down in the near term, suggesting that the pressure will remain for the remainder of 2022.

Alberto Cavallo is an associate professor at Harvard Business School. He was co-founder of the Billion Prices Project.

Editor’s note: The analysis of stockouts in this memo is the result of: Cavallo A. and Kryvtsov O. “What can stockouts tell us about inflation?” Online microdata evidence. NBER Working Paper 29209, September 2021.