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5 NEWS 1.6.2023 The rising cost of food in Europe PAUL COCKS FOOD prices in Europe contin- ue to remain high and will de- cline only later this year. In March, headline inflation in the Eurozone declined to 6.9% y/y (down from 8.5% y/y in February) due to a large drop in energy inflation to -0.9% (down from 13.7% y/y in February) as we mark the one-year anniversa- ry of the jump in oil and gas pric- es after Russia invaded Ukraine. However, food, alcohol and tobacco inflation rose again to 15.4%. At the same time, infla- tionary pressures have broad- ened and become increasingly entrenched; the core inflation rate (which excludes energy, food, alcohol and tobacco) edged up to a new record high of 5.7% (up from 5.6% in February). While headline inflation will noticeably decelerate over the coming quarters (due to strong disinflationary base effects), food prices are expected to re- main high for at least another quarter before a rapid normali- zation sets in. Overall inflation in the Eu- rozone should average 5.6% in 2023 before receding to 2.6% in 2024, with core inflation re- maining rather sticky as wages become the main driver of price pressures. Food inflation will contribute almost one-third to overall in- flation this year (up from less than 20% last year) and should average 8.0% before turning de- flationary (-3.8%) next year. Commodities Cooling commodity prices suggest that other factors might explain continued prices pres- sures on food. Global commodity prices have retreated sharply from their 2022 peaks: wheat and soy beans are now trading at 2021 levels, while corn is about 30% more expensive than in early 2021 and fertilizers remain about 50% more expensive than a couple of years ago; yet food inflation keeps rising. Operating costs of food pro- ducers and retailers seem to explain the growing discon- nect between upstream (com- modity) and downstream food prices: energy (oil: +43% (2022 vs. 2021), wholesale electricity (+145%), packaging (+24% for paper, +18% for glass, +23% for metal, +16% for plastic), and la- bour (unit labour cost in the re- tail sector +5%). Packaged food It seems that packaged food companies rather than retailers have increased their prices the most. Capturing over 70% of all spending on food in Europe, food retailers have historically driven most of the price increas- es over the recent past. Food price increases rose in the second half of 2021 following the surge in agricultural bench- mark prices before accelerating in the wake of Russia's invasion of Ukraine. Retailers have passed most (but not all) of their costs onto customers: In 2022 alone, food producers increased their prices by +17% y/y (compared to "only" +12% for food retailers). Financials from listed food re- tailers confirm that costs rose faster than sales, with 2022 gross margins shrinking and falling below their pre-pandemic levels. e European food sector was hit by higher costs in Q2 2022: At the time, the total cost index for the sector increased by +6.7% while turnover grew by a meagre +0.8%. Since then, turnover growth has been outpacing the cost in- dex, suggesting that firms in the food sector have been increasing prices to make up for lost mar- gins. Feeling the pinch Consumers will continue to feel the pinch. Households in Europe have already lost between 1.1% and 9.2% of purchasing power over the past year, especially in countries most dependent on food imports (especially in East- ern Europe). Nonetheless, not all house- holds are under pressure: ose in the bottom 20% of income distribution have been hit the hardest as they spend a greater share of their disposable income on non-discretionary goods. According to a survey of the 5,000 consumers in 10 countries by the European Institute of In- novation and Technology (EIT), consumers have been cutting costs on non-discretionary ex- penses when possible, buying from cheaper brands or stores. Over one third of participants reported buying less red meat, fish and poultry to cut costs. However, cost-saving behav- iours may not be enough. When consumers pay more for food, they spend less on discretionary items, which could slow the re- covery. A further rise in food prices +20% could lead to almost a 1-pp drop in consumption. Price level indices for food, beverage and alcohol

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