Food Inflation: Profiteering, Challenging Economic Circumstances or Something else?

As we hear of the recent shock 0.5% interest rate rise to tackle the sticky inflation rate, it looks like H2 is going to be a tougher time than we thought at the start of the year.

There is a part of me that does wonder on the impact of the wage rises has backfired somewhat, with pay rises to meet inflation resulting in higher prices, then higher prices raise wages becoming a self-reinforcing loop.

Whilst I do think that this is a contributing factor (and something history has demonstrated to be true), there’s more to it and I have recently been reading up on some interesting data that sheds some light on the stickiest inflationary area: food and drink, which remains high at 18.4%.

Supermarkets have faced calls of taking advantage of the situation and profiteering, leading to calls for a formal investigation which is an interesting one to watch. I’m sure however, that you will agree supermarkets have a tough time in balancing out their selling prices with what they buy at!

The UK is not alone in seeing high food inflation however, which should give some respite. You will see from the graph below how the UK is in the upper quartile when it comes to food inflation, with most countries experiencing 10-20% growth in prices. Interestingly, Russia is the only country with food deflation!

So, what’s behind this and where do we go from here is the question. Is it a hunger for profit or something else? Let’s look at the stats:

·?????Food prices in Europe remain high and will only decline later this year. In March, there was a decrease in headline inflation within the Eurozone, dropping to 6.9% year-on-year (down from 8.5% in February). This decline was primarily driven by a significant decrease in energy inflation, which reached -0.9% (down from 13.7% year-on-year in February). This change coincides with the one-year anniversary of the surge in oil and gas prices following Russia's invasion of Ukraine. On the other hand, inflation in food, alcohol, and tobacco experienced a further increase, reaching 15.4%. These prices are expected to remain elevated until the end of the year.

·?????Cooling commodity prices have not helped mitigate food price pressures in Europe By April 2023, the majority of food commodities are being traded at levels that are either near or slightly higher compared to those observed in 2021. While certain commodities continue to be expensive, it is noteworthy that similar prices were observed during the period of 2013-2014 without a significant surge in food inflation. The main source of price pressures can be attributed to packaged-food producers.

·?????Some food inflation remains “unexplained” due to catch-up profit-taking. One possible explanation for this could be that companies in the food industry are trying to recover from the challenging period between March and June 2022. It appears that the majority of these firms have been able to generate higher revenue compared to their costs since that time.

·?????Consumers will continue to pick up the tab. With the recent turning point in Producer Price Index (PPI), it is anticipated that prices will continue to rise until the summer and remain at elevated levels. Our estimates suggest that households have experienced a loss in purchasing power ranging from 1.1% to 9.2% over the past year, with Eastern European countries being the most affected. If there is an additional increase of 20% in food prices, it could potentially result in a 1-percentage point decrease in consumption within the EU.

A little more insight into food production shows how, whilst the cost of raw materials has decreased, the cost of fertilizer and corn specifically are significantly above levels from January 2021.

Interestingly, however, there is quite a chunk compared to the past 18 years that is simply unexplained at around 1% currently but peaking at around 1.5%. Could this be a catch up in profits as suggested above?

When we look at overall inflation however, the stats below show how, whilst food is a significant, it’s the second to bottom in terms of percent for 2023 so far across the Eurozone. Services and goods make up the lion’s share.

The question is, where do we go from here? Yes, the storm rages on and the robust, well-prepared businesses are the only ones who will ride out the turmoil. According to the most recent forecast, food inflation peaked at Q1 2023, but has a long road to recovery over the next 12 – 18 months.

Businesses need to focus on using tools like Credit Insurance to mitigate the storm, when waters get choppy history has always given us a curve ball, think Woolworths, Carillion, Russell Hulme, there is always a surprise.

Credit Insurance asses the risk of your customers based on up-to-date management information and not out of date audited accounts, they underwriter in the here and now and mostly manage to trade you out of any future shipwrecks. But even they get a tidal wave sometimes, and that’s the beauty of the product. If they get can’t see the storm heading in and you take a surprise hit, the insurance side pays out.

However, Credit Insurance should be seen as a source of information not as a worst-case scenario claim payment mechanism. It should help businesses navigate storms, new territories and provide a platform for grow, exploring new seas. If you the align such a product with AI and BI Tools that then monitors your trade debtors vs your Trade Credit Insurance and squeezes the most out of the product, then you’re on informed waters and isn’t information everything?