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Eurozone’s shoppers to swallow more super-sized food price rises, warns ECB

According to a report from the European Central Bank, food prices for euro-zone shoppers will continue to rise at almost record speed for at least another year, despite the region’s large agricultural industry.

The EU produces more agricultural products than it consumes. But this has not isolated Europe from the rise in food prices that has engulfed much of the world, caused by rising fuel and fertilizer costs for farmers and the impact of the Russian invasion of Ukraine on the supply of key products.

Food prices in the 19 countries sharing the euro rose by 7.5 percent in the year to May, a record high since the introduction of the single currency in 1999. Annual food inflation is higher in the US and UK, but prices are rose faster in the eurozone over the past three months.

The ECB said in an article The monthly research bulletin published Tuesday shows that food inflation is “expected to remain high in the coming months, despite some counterbalancing factors” such as higher domestic production or a switch to alternative sources.

The central bank pointed to a rise of more than 40 percent in farm and wholesale food prices in the eurozone and predicted that further “price pressures will affect food prices for euro area consumers along the price chain in the coming months”.

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The rising cost of fertilizers, which shot up 151% in the EU in the year to April meant food prices would continue to rise in 2023, the central bank said.

Monetary policymakers would normally look beyond short-term food price increases as a supply-driven source of inflation over which they have little control. But if food prices continue to rise, people’s expectations that costs will continue to rise could become entrenched. Consumers are more sensitive to sharp increases in their weekly food bill, because it is more noticeable than other costs.

Jennifer McKeown, Head of Global Economics at Capital Economics, said policymakers “no longer have the luxury” to dismiss food inflation, “particularly because food prices are so visible and influential on the inflation psyche.” She predicted that if agricultural commodity prices continued to rise, it would reduce consumer spending in advanced economies by 0.7 percent.

The ECB announced this month that it would begin raising interest rates in July in a bid to combat inflation, which at more than 8 percent is now four times the policymakers’ target of 2 percent.

The invasion of Ukraine, known as “the breadbasket of Europe”, has massively reduced exports of wheat, corn and sunflower oil. The war also affected supplies of fertilizer from Russia and potassium from Belarus.

Bar chart of Share of extra-euro area imports from Russia, Ukraine and Belarus (percent) showing that the food supply from outside the euro area has been influenced by Ukraine

The ECB said Ukraine, Russia and Belarus together accounted for just 2% of food and fertilizers imported into eurozone countries in 2020. maize, which is widely used for animal feed, sunflower oil and manure.

Disruption of fertilizer or maize supplies would likely push up the price of many other food commodities by increasing costs for farmers, the central bank said. Alternative deliveries of these products would be more expensive, it added.

“Households can replace sunflower oil with other vegetable or animal oils and fats, but it is also used in a number of processed foods, so the reduced supply has a big impact,” it added.

In the Baltic states and Finland, which rely more on Russia, Ukraine and Belarus for agricultural imports and fertilizers than most eurozone countries, food inflation was well above the bloc average at 12 to 19 percent.

Even if food manufacturers buy their ingredients from domestic farmers or those in other eurozone countries, they will still have to pay more because of the sharp rise in world prices for many agricultural commodities and sharply higher energy and fertilizer costs for farmers, the ECB said.

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