Why Food Inflation Could Still Be a Big Problem for the Global Economy

Inflation trends look good, but don’t miss the potential danger from higher food prices. 

While overall inflation appears to be improving, food inflation remains stubbornly high in many regions and still possesses the potential to cause wider economic problems. 

It’s important to note that, globally, conditions have been improving. The UN’s food price index — which measures the monthly change in international food commodity prices — was down 11.8% in July compared to a year earlier. And the US saw its food inflation drop to 4.9% on an annual basis in July, a notable improvement from 2021 to 2022, when prices grew by 11% year over year.  

At the same time, many countries are facing higher food prices. According to the World Bank, food inflation is over 5% in 63.2% of low-income countries, 79.5% in lower-middle-income countries and 67% of upper-middle-income nations. Almost 79% of high-income countries have high food inflation. 

In some nations, the increases are much higher than 5%. 

In the UK, for example, food inflation was 14.9% on an annual basis in July, down from 19.2% in March. The price of some staples — including milk, cheese, butter and bread — has increased by more than 30% over the past two years, according to Which?, a consumer advocacy organisation. 

Food prices in the European Union soared by 19.2% on an annual basis in March and then cooled significantly — but were still over 12% this summer. 

How does food inflation affect the economy?

It’s easy to understand the impact that food inflation can have on individuals. Higher prices exert an almost immediate effect on families, their health and their quality of life. Paying more money for groceries leaves less for other spending. 

But long-term food inflation can lead to trouble for the larger economy, too. If the public believes that prices are only going to go higher and higher — and if their expectations for inflation become entrenched — those beliefs can become a self-fulfilling prophecy. 

Businesses would continue to raise prices, and that would force workers to seek higher pay, which leads businesses to raise prices, and so on, creating a wage-price spiral. 

There are some signs that such beliefs are becoming entrenched. This summer, ING Consumer Research surveyed people in eight European countries and found that 85% expect, five years from now, to be paying as much or more for food than they are now. 

More than 30% expected to spend “a much larger fraction of my net income” on food, the survey found. 

Where food inflation is highest

Food inflation remained high in several regions during the first half of 2023, the World Bank reported. Prices increased the most in:

• Europe and Central Asia (up at least 16.7% in half of those countries). 
• sub-Saharan Africa (up more than 13.4% in half the region’s countries). 
• Latin America (up more than 11.5% in half the countries there). 

Some countries are enduring even worse price hikes. Argentina, Lebanon, Venezuela and Zimbabwe have all experienced food inflation over 100%, the World Bank reported.

Even countries with comparatively moderate inflation are facing challenging situations.

• India’s food inflation was 11.51% in July on an annual basis, driven partly by rising costs for vegetables and some grains. As a result, the country enacted a 40% tax on onion exports, and it implemented an export ban on non-basmati rice, with some exceptions.
  
• Overall, Australia’s food inflation was 7.5% on an annual basis, but several categories have recorded sharp price increases, like dairy and related products (up 15.2%) and breads and cereals (11.2%).
  
• In July, Canada enjoyed one of its lowest increases in grocery prices in more than a year — but that increase was still 8.5% on an annual basis. 

What is the cause of food inflation? And how is it affecting suppliers?

Several factors are contributing to higher food prices.

The COVID-19 pandemic and its accompanying lockdowns, hospital stays and deaths unsettled supply chains around the world. Food prices spiked because suddenly there was a lack of workers to butcher meat, process and package food, and staff the ports where imports could be received. 

The pandemic was closely followed by the Russia-Ukraine war, which disrupted the production of grains and oils for many regions — not just Europe, but the Middle East, Africa and others.

The war also raised the cost of fuel, which in turn raised the cost of food production for suppliers. 

Plus, as wages have increased in several markets, so has suppliers’ cost of production, which has been passed along in the price charged in stores.  

And that’s just the start of the list. There have also been one-off disruptions like extreme weather, avian viruses and others that interfered with production and raised prices for food. 

Food inflation has increased even as the price of food commodities has largely declined. It’s possible that food-based businesses — which originally ate much of the higher costs — are passing along more of their costs to consumers, The Economist’s Intelligence Unit reported. 

What is the forecast for food inflation?

The good news is that several forecasts are calling for food inflation to continue cooling, though with some warnings. 

• The World Bank expects its food price index to be lower for 2023 compared to 2022, as global wheat production hits a record high. Production of edible oils like sunflower and soybean should also improve.
  
• The US should see food inflation of 2.4% next year, according to the US Department of Agriculture, though the prediction interval is -2.8% to 7.9% at this point.
  
• UK food inflation should continue falling through the end of 2023, but it probably won’t fall below 10% year over year, the Bank of England reported.

The bank’s economist, Huw Pill, was blunt: “Unfortunately, the days of seeing food prices fall … does seem to be something we may not be seeing for a little while yet if in the future at all.”

One thing to keep in mind: Food prices are only one element of inflation, which may soften the blow. In the US, food accounts for roughly 14% of the Consumer Price Index produced by the US Bureau of Labor Statistics. Even if food prices remain high, it could be offset by declines in other sectors. 

The bottom line on food inflation

It’s great news that overall inflation is cooling. But a similar pattern needs to continue for food inflation, too, or it could create significant problems for individual consumers and ultimately the larger global economy. 

Food businesses may find themselves under pressure due to higher fuel and staffing costs. By using C2FO’s Early Pay solution, they can improve their cash flow in order to adapt to higher prices. Learn more here.