2023-05-12 15:05:00
A headache for the European Central Bank (ECB) and a source of tension for governments, inflation continues to remain high in Europe, with food prices having taken over from energy prices in recent months. Although the prices of natural gas and a barrel of oil have fallen respectively by more than 60% and more than 30% over one year, the same is not true for food. While in the euro zone, inflation stood at 7% in April, after 6.9% in March, “The rise in food prices remains high, however, at 13.6% in April compared to 15.5% in March”stressed Christine Lagarde, President of the ECB, on May 4, after announcing a new rate hike of 25 basis points.
+15% in France
In France, if INSEE predicts that after the peak of 5.9% over one year reached in April, the price index could slow to 5.4% by mid-June, the institute of statistics highlights the problem posed by the modification of its composition over the quarters, with a preponderance of food prices up 15%. France is no exception. In Germany, “Despite the easing of supply issues, pressure on food prices remains high and the majority of retailers expect prices to continue to rise in the near term,” notes this week Patrick Höppner, of the Ifo institute, who also shares“a shortage of qualified personnel which remains an urgent problem for many grocery businesses. »
This unprecedented situation blurs the tracks for anticipating price trends. “From the late 1980s until the pandemic, the food basket in rich countries grew by around 2% per year. It was six times higher last year and the trend was further strengthened in early 2023 in several European countries”notes Bruno Cavalier, Chief Economist at Oddo BHF.
Like other segments of the economy, the food sector suffered various shocks on production and distribution caused by the appearance in 2020 of the Covid-19 pandemic and its generalized confinements which were amplified with the invasion of Ukraine by the Russian army in February 2022. In addition, this deadly and destructive conflict which continues to this day opposes two major producing countries of cereals and fertilizers.
However, after soaring for part of 2022, food prices have been falling for several months (see graph, the FAO index).
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Paradoxically, unlike energy, this is not reflected in the final price for the consumer. “There is always some delay in the process of transmitting wholesale to retail prices. This partly depends on the degree of competition in the sector. Between the producer and the consumer, there are indeed a large number of stakeholders, manufacturers, carriers, distributors, each with a margin to defend., explains Bruno Cavalier. And it also depends on the country. It is faster in the Anglo-Saxon countries and in Germany than in the countries of southern Europe.
Dialogues of the deaf between manufacturers and distributors
In France, it could even take longer due to the dialogue of the deaf between producers in the agri-food sector and distributors who have started their annual negotiations, without result for the moment. The former are put in the hot seat because they take advantage of lower production costs while benefiting from high selling prices, which allows them to increase their margins. “The food sector is one of those where the expansion of profit margins has been the strongest, amplifying a price shock that came originally from exogenous disruptions linked to the pandemic”, recalls Bruno Cavalier. The sector’s unit profits have thus jumped by more than 50% since 2019, almost half of which in 2022.
Faced with consumer dissatisfaction, the government is putting pressure on it. “Manufacturers do not play the game, they refuse to come back to the negotiating table to negotiate lower prices”declared Thursday evening the Minister of the Economy Bruno Le Maire, announcing that he would receive them next Wednesday. “If ever the agri-food manufacturers refuse to enter into this negotiation, which obviously I cannot imagine, we will use all the instruments at our disposal, including the tax instrument, to recover margins which would be margins wrongdoing made on the backs of consumers”, threatened Bruno Le Maire. According to the Minister Delegate for Trade, Olivia Grégoire, the decline in food prices will not occur before the start of the school year.
But another phenomenon could play on the market, that of the behavior of households. “There is no example in the past of a significant reduction in the volume of food expenditure in response to a price increase. But this is exactly what we have observed since the current price shock began”, notes the economist of Oddo BHF. In France, in the first quarter of 2023, the correlation is telling. The fall in food expenditure stands at 8.5% over one year, while the rise in prices is 13.1%, according to official data.
Price hikes that have gone too far?
Other major economies in Europe are also seeing consumers take a similar attitude (see graphic). “The fall in volumes consumed may therefore be a sign that price increases have gone too far, which cannot fail to cause pressure to obtain either wage increases or price reductions”warns Bruno Cavalier.
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A general wage increase would be likely to keep prices high. What governments want to avoid for the moment, especially since Christine Lagarde has warned that “Russia’s war against Ukraine could again cause energy and food costs to rise.”
In reality, the only certainty is that there are still too many unknowns to be able to clearly anticipate when the inflation shock will subside.
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