Eurozone's consumers to swallow extra supersized meals worth rises, warns ECB

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Food costs for the eurozone’s consumers are set to maintain rising at near-record charges for at the least one other yr, regardless of the area’s largely self-sufficient agriculture sector, in keeping with the European Central Bank.

Russia’s invasion of Ukraine has disrupted provides from the war-hit area and led to a surge within the worth of key agricultural commodities imported from there, corresponding to fertiliser, animal feed and sunflower oil.

An ECB report on Tuesday warned that is pushing up prices for European farmers and meals producers nicely past those who rely straight on imports from Ukraine or Russia — and is more likely to drive broader will increase in what shoppers pay for his or her weekly groceries.

In an article from the ECB’s month-to-month analysis bulletin revealed on Tuesday, officers mentioned meals inflation was “expected to stay high in the coming months, despite some counterbalancing factors”, corresponding to elevated home manufacturing or a change to various 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 price 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.

The EU produces extra agricultural merchandise than it consumes. But this has not insulated the area from the surge in food prices sweeping throughout a lot of the world.

The worth of meals within the 19 nations that share the euro rose 7.5 per cent within the yr to May, an all-time excessive because the single forex was launched in 1999. Annual meals inflation is greater within the US and UK, however costs have been rising sooner within the eurozone over the previous three months.

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, folks’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 could lower client spending in superior economies by 0.7 per cent.

The ECB introduced this month that it could start elevating charges in July in a bid to fight inflation that, at greater than 8 per cent, is now 4 instances 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 conflict additionally hit provides of fertiliser from Russia and potash from Belarus.

Bar chart of Proportion of non-euro area imports from Russia, Ukraine and Belarus (per cent)  showing Food supplies from outside the euro area have been impacted by Ukraine

The ECB mentioned Ukraine, Russia and Belarus solely accounted for a mixed 2 per cent of the meals and fertiliser imported into eurozone nations in 2020. But it added that the bloc nonetheless relied closely on the provision of sure merchandise from the three nations, corresponding to maize, which is used broadly for animal feed, sunflower oil and fertiliser.

Disruption to the provides of fertiliser or maize have been more likely to push up the worth 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 nations, meals inflation has been nicely above the bloc’s common at between 12 and 19 per cent.

Even if meals producers purchase their components from home farmers or these in different eurozone nations, they’ll nonetheless need to pay extra because of the surge in international costs for a lot of agricultural commodities and sharply greater power and fertiliser prices for farmers, the ECB mentioned.

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