Why are food prices so high in Europe?

IT’S the most basic of staple food items – sliced white bread. In Britain, the average price of a loaf, at £1.39 (S$2.33), rose 28 per cent in April from a year earlier.

In Italy, the price of spaghetti and other pasta, a fixture of the Italian diet, rose nearly 17 per cent from the year before. In Germany, the European Union’s (EU) largest economy, cheese prices increased to nearly 40 per cent higher than a year ago, and potatoes cost 14 per cent more.

Throughout the EU, consumer food prices on average rose nearly 17 per cent in April from a year earlier. This was a slight slowdown from the previous month, which set the fastest pace of growth in over two and a half decades. The situation is worse in Britain than in its Western European neighbours. Food and non-alcoholic drink prices were 19 per cent higher, representing the quickest pace of annual food inflation in more than 45 years. By comparison, the annual rate of US food inflation was 7.7 per cent in April.

Persistent food inflation is squeezing low-income households and troubling European politicians. In Italy, the government held a meeting this month to discuss soaring pasta prices.

At the same time, the major costs that go into making food products, including fuel, wheat and other agricultural commodities, have been falling in international markets for much of the past year. This has raised questions about why food prices for consumers remain so high in Europe. With rising labour costs and the possibility of profiteering, food prices are unlikely to come down anytime soon. More broadly, rising prices could also put pressure on central banks to keep interest rates high, potentially restraining economic growth.

What is driving up food prices?

Behind the sticker price for a loaf of bread includes the costs for not only key ingredients but also processing, packaging, transport, wages, storage and company markups.

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A United Nations index of global food commodity prices, such as wheat, meat and vegetable oil, peaked in March 2022, immediately after Russia’s invasion of Ukraine, which is one of the world’s largest grain producers. The war disrupted grain and oil production in the region. It had global impact, too, worsening food crises in parts of East Africa and the Middle East.

But the worst was avoided, in part because of a deal to export grain from Ukraine. European wheat prices have declined about 40 per cent since last May. Global vegetable oil prices are down about 50 per cent. But there is still a ways to go: The United Nations’ food price index was 34 per cent higher in April than its 2019 average.

Aside from commodity prices, Europe has experienced particularly harsh increases in costs along the food supply chain.

Energy prices soared because the war forced Europe to rapidly replace Russian gas with new supplies, pushing up the costs of food production, transport and storage.

Though wholesale energy prices have fallen back down recently, retailers warn there will be a long lag – perhaps up to a year – before consumers will see the benefits of that, because energy contracts were made months before, most likely reflecting those higher prices.

And the tight labour markets in Europe – with high job vacancy rates and low levels of unemployment – are forcing employers, including food companies, to push up wages to attract workers. This in turn drives up costs for businesses, including in the food sector.

Is profiteering keeping prices high?

Suspicions are growing among consumers, trade unions and some economists that inflation could be kept needlessly high by companies raising prices above their costs to protect profit margins. The European Central Bank said that at the end of last year, corporate profits were contributing to domestic inflation as much as wage growth, without specifying particular industries.

Economists at Allianz, the German insurer and asset manager, estimate that 10 per cent to 20 per cent of food inflation in Europe can be attributed to profiteering. “There is part of the food price inflation that we see which is not explainable, easily,” said Ludovic Subran, chief economist at Allianz.

But the lack of detailed data about corporate profits and supply chains has caused a rift in economic opinions.

Some economists and food retailers have pointed fingers at big global food producers, which have sustained double-digit profit margins while raising prices. In April, Swiss giant Nestle said it expected its profit margin this year to be about the same as it was last year, about 17 per cent, while it reported raising prices almost 10 per cent in the first quarter of 2023.

Even taking into account expenses such as transport and accounting for pricing lags from farms to shelves, Subran said he would have expected food inflation to come down by now.

In Britain, some economists are telling a different story. Michael Saunders, an economist at Oxford Economics and former rate-setter at the Bank of England, said in a note to clients in May that “greedflation” was not the culprit. Most of the increase in inflation reflects the higher cost of energy and other commodities, he said.

Rather than rising, total profits for non-financial companies in Britain, excluding the oil and gas industry, have fallen over the past year, he said.

Britain’s competition regulator also said that it had not seen evidence of competition concerns in the grocery sector, but that it was stepping up its investigation into “cost-of-living pressures”.

Have food prices peaked?

Despite well-publicised cuts to milk prices in Britain, food prices in general are unlikely to go down in the near future. Instead, policymakers are closely watching for a slowdown in the rate of increases.

There are tentative signs that the pace of food inflation – the double-digit increase in annual prices – has reached its pinnacle. In April, the rate fell in the EU for the first time in two years.

But the slowdown from here is likely to be gradual.

“It appears to be taking longer for food price pressures to work their way through the system this time than we had expected,” Andrew Bailey, governor of the Bank of England, said this month.

Across the continent, some governments are intervening by capping prices on food essentials, rather than waiting for economic debates about corporate profiteering to play out.

In France, the government is pushing an “anti-inflation quarter”, asking food retailers to cut prices on some products until June. But the finance minister, Bruno Le Maire, said this month that he wanted food producers to contribute more to the effort. He warned they could face tax penalties to recover any margins unfairly made at the expense of consumers if they refuse to return to negotiations.

These efforts may help some shoppers, but on the whole there is little to comfort Europeans. Food prices are unlikely to decline – it’s likely only that the pace of increases will slow later this year. NYTIMES