The rise of food prices and inflation

Darren Rigden, Partner, Audit and Business Solutions 
The problem
According to a recent BBC article soaring food costs have pushed UK inflation into double digits for the first time since 1982, with prices continuing to rise at their fastest rate for more than 40 years. The price of bread, cereals, milk, cheese and eggs rose the fastest, while the cost of vegetables, meat and chocolate were also higher.

Global food prices have surged 65% since the start of the COVID-19 pandemic and by 12% this year alone since the start of the Russian invasion of Ukraine, according to data from the United Nations’ Food and Agriculture Organisation.

The result will be less discretionary spending, especially for low-income households and therefore a wide impact on the economy besides the obvious casualties such as the hospitality sector which was already battered by COVID and a succession of lock downs.

Most countries are suffering, but developing countries will be harder hit and typically their populations spend a higher percentage of their income on food. For example, food prices in Africa are rising rapidly as they are heavily reliant upon imports and are also significantly impacted by weather patterns.

The cause

In short food price increases are the result of supply chain issues, energy prices, the war in Ukraine and weather patterns all combining into a perfect storm.

The cause of the increases in prices started with the pandemic and resulting restrictions in various supply chains which led to shortages and ultimately pent up demand. This was made worse this year as the war in Ukraine hit food supply chains directly with food becoming stuck in fields, warehouses and ports, whilst the war also caused a spike in energy prices. This had the knock on effect of driving fertilizer and shipping costs higher which in turn impacts on food prices.

The impact of global warming has further damaged supplies this year with record dry seasons and temperatures impacting on crops.

Higher fuel prices are making costs rise even faster. Freight costs have gone up sharply since the pandemic, hindered by shipping and logistical problems caused by successive lockdowns which are still occurring in China.

Another key reason behind rising food prices is higher fertilizer costs - an essential part of the food-production chain. This is driven by energy prices and shortages of the materials used in fertiliser production coupled with the fact a large percentage traditionally came from Russia and Ukraine.

The impact

The impact is a falling discretionary spend and higher inflation which will have a significant impact on economic recovery across the world. Emerging markets, where food represents a large share of overall consumer spending, will be hit particularly hard.

The hospitality industry is facing huge cost increases on top of labour shortages. This follows several hard years due to lock downs and will be the final straw for many businesses as people will reduce their spending in the sector as they tighten their belts with a general rise in inflation and a falling discretionary spend.

Low-income households typically spend a higher share of their income on food and the type of food they buy are typically foods that have risen most in price such as cereals and breads. They will become more reliant on foodbanks with the trend in their use increasing at a worrying rate. Interesting a recent BBC report commented on the fact that these are being used more and more but the amount supermarkets donate is falling as they tackle food waste which means they have less to donate to the foodbanks.

The biggest fear is that rising food inflation leads to food shortages and civil unrest and in turn further wars and supply chain issues.

The outlook

The outlook is divided, some believe prices will remain high for the foreseeable, at least until the war ends and supply chains are re-established. However, in a recent report Morgan Stanley has suggested a light at the end of the tunnel and suggest prices will fall in 2023 saying “Farming margins have been high for several years, buoyed by high grain prices, which have offset hikes in fertilizer costs. This has allowed crop investments and acreage expansion; both should help supply.” Let’s hope that this is true not only for the food and beverage sector but also for the wider economy.

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Darren Rigden
Darren Rigden
Partner, Audit and Business Solutions