Jim Power: Irish consumers likely to face higher food prices

Given how accustomed consumers have become to food price compression as a result of intense domestic retail competition and competition from imports, an escalation in food prices would come as a significant shock. 

For central bankers and policymakers, the past decade has been pretty straightforward. Growth was anaemic, particularly in Europe and Japan, and inflation has been conspicuous by its absence, meaning there were few hard choices to be made.

Alas, all of that has changed in dramatic fashion over the past six months and the controllers of monetary policy are now facing serious challenges, and in many ways, a very unenviable task.

Towards the end of last year, as the world emerged from the Covid restrictions against a background of a relatively successful vaccination programme, it became apparent that supply chains were badly damaged and couldn’t cope with the resurgence in demand. 

Widespread scarcities and rapid price increases became an issue, but the consensus view was that these supply-side difficulties would abate and inflation would settle back down again. Unfortunately, this did not factor in the brutality of Russian President Vladimir Putin.

All of the inflationary issues that existed in January have been dramatically exacerbated. Levels of inflation not seen since the aftermath of the second oil crisis in the late 1970s are now being experienced in many countries.

Initially, the main price pressures were driven by energy and associated products as oil, natural gas and coal prices shot up. The Government stepped in again this week with a package of measures to alleviate the pressures from rising fuel bills by cutting the Vat rate on gas and electricity bills to 9% on a temporary basis.

The move will save households €50 on the annual gas bill and €70 on an electricity bill. Such savings are quite minimal but are of some assistance to financially pressurised households.

Energy costs will be less of an issue in the summer months, but one of the significant concerns now is what could happen to food prices over the coming months. 

The annual rate of food price inflation in Ireland reached 3% in March, which is the highest annual rate since December 2008. In the US this week, March inflation hit 8.5% and food prices increased by 8%. UK inflation hit a 30-year high of 7%, with food price inflation running at 5.8%.

The United Nations Food and Agriculture Organisation, the FAO, recently revealed that its monthly global food price index hit a new high. The pressures are building. 

Global wheat prices are over 73% higher than a year ago, which is primarily a consequence of the Ukraine war, and it is difficult to envisage those prices coming down as long as the war persists. It also remains to be seen if there is any major wheat crop in Ukraine next year. 

However, it is important to recognise that the input costs to agricultural production here in Ireland had been rising strongly even before the savage invasion. These costs included heating, electricity, fuel, fertiliser and labour costs. 

These pressures have been exacerbated by the crisis in Ukraine and it seems inevitable that primary producers will continue to feel a greater margin squeeze over the coming months. How much of this is pushed on to the consumer will be largely determined by the behaviour of the retail grocery sector. 

There is of course a limit to how far primary producers can be squeezed and stay in business, so it does seem highly likely that Irish consumers will face higher food prices over the coming months.

Given how accustomed consumers have become to food price compression as a result of intense domestic retail competition and competition from imports, an escalation in food prices would come as a significant shock. 

Politically, this would be much more difficult and contentious than energy costs. Rising food prices have a tendency to be very contentious, and of course the Government has created a precedent with its financial intervention in consumer energy markets.

The Ukraine war coming on top of the Covid-related difficulties is just a perfect storm in relation to inflation, and for those of a certain age, the experience of the two oil price shocks in the 1970s is resonating at the moment.