Capital Economics: Why Food Prices Are Not Decreasing Despite Falling Inflation

Food prices continue to record growth, despite the fact that a sharp slowdown in inflation is expected in the coming period.

This is reported by Capital Economics, noting that history has shown that the slowdown in inflation is not reflected in the slowdown in food prices. In addition, due to rising labor costs, according to the analyst firm, food inflation in the Eurozone will remain positivedespite a clear decline in overall indicators (except for food prices) recorded in the last two months.

With regard to the main trends affecting food inflationanalysts point to a significant reduction in prices for agricultural products and energy. Compared to last year’s highs agricultural prices fell by a quarter, the price of Brent oil in euros (the main factor in production and transport costs) fell by a thirdand wholesale gas prices (which significantly affect the cost of fertilizers) fell by about 90%.

Experts from Capital Economics believe that the pace food inflation will not decreasebecause the food prices are falling for two reasons. On the one hand, historically Food deflation in the Eurozone is extremely rare.

Since 1997, when food, beverage, and tobacco price data began to be recorded, the relative index has been negative on an annualized basis for only 13 out of 327 months. The lowest level to which food inflation has fallen (annualized) is -0 ,4%.

On the other side, the labor force is getting more expensive year after year. Given the unusually high proportion of food manufacturers who say labor shortages are limiting their production, Capital Economics expects wage growth will remain high during some time. This, experts point out, partially offsets the impact of lower prices for energy and agricultural products.

So, according to Capital Economics, inflation in the food, beverage and tobacco category will fall below 5% by the end of the year and below 2% by mid-2024.

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