What’s behind the spike in food inflation – recent developments, drivers and outlook in the euro area

The chapter discusses the recent surge in euro area food inflation in 2022-23 to a peak of 15.5% in March 2023, which has significantly impacted low-income households. The rise in food inflation, affecting both processed and unprocessed food, has contributed significantly to overall inflation. The dispersion of food inflation across countries increased to unprecedented levels in 2022, with the hardest hit countries being the Baltic countries (Estonia, Latvia and Lithuania), Slovakia and Croatia. This chapter analyses quantitatively the drivers of the recent spike along the pricing chain of food products in two steps. First, an input-output price analysis looks at input costs, wages and operating surplus of the food manufacturing sector comparing it with the output prices of the sector. Second, an econometric analysis looks at how food producer prices and the main inputs and the value added of the distribution sector impacted food consumer price inflation. Thus, the impact of global shocks such as global commodity prices, Russia’s war of aggression against Ukraine, global supply bottlenecks are captured through their effects on input prices and value added. The results indicate that the main contributors to the rising costs of the food manufacturing industry were agricultural produce, energy, distribution and packaging costs. Input prices rose faster than output prices until the end of 2021, a development which has however been partly reversed since then. This indicates that current profits are probably compensating for losses in profitability sustained in the previous 1.5 years. Regarding food consumer prices, the rise of 2022-23 was driven mostly by food producer prices, while energy prices and the value added of the distribution sector also played a role. Looking ahead, as past shocks have been priced in and passed through the entire food value chain, food inflation should continue to fall unless there are renewed pressures on input prices or a strong reaction of wages and profits in the food or the distribution sectors