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US vs Eurozone food inflation

30 June 2022 Lee Bridgett
  • Food price inflation in May reaches 10.1% in the US, 8.9% in the Eurozone
  • Eurozone sees higher inflation rates for wheat, fats and oils, commodities affected by the war in Ukraine
  • Central bank actions show early signs of tempering inflation in the US, but the global picture remains uncertain

Annual US food price inflation reached 10.1% in May, while a similar measure for the Eurozone registered 8.9%. Although the figures of 10.1% and 8.9% suggest food price inflation is nearing similar levels in the US and Europe, a closer look shows two different inflation pictures on each side of the Atlantic.

Inflation broader-based in the US, more commodity-driven in Europe, for now

In the US, food prices have been rising for a longer period, led by a faster economic recovery from the Covid-19 pandemic. US food prices have also been rising more broadly across categories, indicative of general inflationary pressure in the economy. In February, prior to the price spike caused by the war in Ukraine, US food price inflation was already at a level of 7.9%, while in the Eurozone the figure was 4.8%.

In Europe, we see a wider disparity in food price inflation across categories, with more significant pressure on commodities directly impacted by the war in Ukraine. We also see a lower core inflation rate (the inflation rate excluding food and energy) in Europe, indicating that inflation is, at least at present, being driven more by the recent pressure on food and energy prices. In May, the core inflation rate was 3.8% in the Eurozone, compared with 6% in the US.

Notably, core inflation in the US slowed from 6.2% in April to 6% in May. In the Eurozone, core inflation continued to rise from 3.5% in April to 3.8% in May. The US Federal Reserve raised interest rates by a half a percent in May, and further by three-quarters of a percent in June. The slowdown in core inflation in the US as well as the drop in commodity prices in June may be an early indicator that these steps are beginning to have an impact. The European Central Bank has indicated it will raise interest rates in July for the first time since 2011. Whether this will similarly impact Eurozone inflation remains to be seen.

Wheat, fats and oils inflation higher in Europe

The war in Ukraine has increased global prices for various commodities, notably wheat and vegetable oils. The impact on wheat prices can be seen in inflation rates for bread; prices in May registered an annual inflation rate of 8.7% in the US and 10.3% in the Eurozone.

Inflation has been starker for vegetable oils and other fats. In the Eurozone, the annual inflation rate for fats and oils was 26.8% in May, while in the US the annual inflation rate for fats and oils was 16.9%. Similar inflation rates were also seen for butter, where prices were already elevated in Europe due to high dairy prices. The Eurozone annual inflation rate for butter in May was 25.1%, while in the US the figure was 15.9%.

Higher food inflation in US for most other categories

In the US, the annual inflation rates in May for meat (12.3%), eggs (32.2%), dairy (11.8%), and fruits and vegetables (8.2%) were all higher than comparable figures in the Eurozone for meat (10.1%), milk, cheese and eggs (9.9%), fruits (3.9%), and vegetables (7.4%).

Inflation has been rising faster and for longer in the US than in the Eurozone due to differences in economic recoveries from the Covid-19 pandemic. However, as previously mentioned there are some signs inflation is beginning to slow in the US. Meat prices' inflation rate was 12.3% in May, down from 14% level recorded in February.

In Europe, meat prices have seen a sharp rise in recent months, driven by high feed prices, reduced supplies, and growing demand following the removal of remaining lockdown restrictions. Eurozone meat prices registered an annual inflation rate of 10.1% in May, compared with a 3.4% rate in February.

Within the meat category, poultry had the highest rates of price inflation in May, as both the US and Europe deal with ongoing challenges from Highly Pathogenic Avian Influenza (HPAI). Price inflation for poultry in May was 16.6% in the US and 15.3% in the Eurozone.

Egg production has also been impacted by HPAI, though the impact has been more severe in the US. In May, egg prices registered an annual inflation rate of 17.9% in the Eurozone and 32.2% in the US.

Annual inflation rates, May 2022

Selected expenditure category

US Consumer Price Index (CPI)

Eurozone Harmonised Index of Consumer Prices (HICP)

Food

10.1%

8.9%

Bread

8.7%

10.3%

Fats & oils

16.9%

26.8%

Butter

15.9%

25.1%

Meat

12.3%(meat)

10.2%(beef & veal)

13.3%(pork)

16.6%(poultry)

10.1%(meat)

10.9%(beef & veal)

10.9%(pork)

15.3%(poultry)

Fruits & vegetables

8.2%(fruits & vegetables)

3.9%(fruit)

7.4%(vegetables)

Milk, cheese, & eggs

16.9%(milk, whole, fresh)

8.7%(cheese & related products)

32.2%(eggs)

10.7%(milk, whole, fresh)

9%(cheese & curd)

17.9%(eggs)

Energy & transportation

Gas

30.2%(utility (piped) gas service)

52.9%(gas)

Liquid fuels

48.7%(gasoline (all types) (US))

73.4%(other motor fuels)

28.6%(petrol/gasoline)

37.5%(diesel)

Source: US Bureau of Labor Statistics; European Central Bank© 2022 IHS Markit

Inflation higher for electricity prices in Europe, higher for gasoline and diesel prices in the US

Similar to the challenges with wheat and vegetable oils, energy prices have risen globally, but Europe has faced more severe impacts due to greater economic exposure to Russia. In May, gas prices registered an annual inflation rate of 52.9% in the Eurozone. In the US, price for Utility (piped) gas service had an annual inflation rate of 30.2%. Electricity prices in May registered an annual inflation rate of 31.9% in the Eurozone and 12% in the US.

The US, however, has faced a sharper increase in prices for automotive fuels. In May the inflation rate for motor fuels (including gasoline as well as others such as diesel fuel), was 49.1%. In comparison, the Eurozone registered an annual inflation rate in May of 37.5% for diesel fuel and 28.6% for petrol/gasoline.

The road ahead

In 2021, the US Federal Reserve Chairman Jay Powell and other Fed officials stated that rising inflation was "transitory", driven by lingering supply-side challenges from the Covid-19 pandemic and robust consumer demand. The use of the word transitory prompted criticism as inflation continued to rise, and ultimately led Powell to say it was "time to retire" the word in November 2021.

Supply chain bottlenecks, increased consumption of goods (instead of services), aggressive fiscal stimulus in the US, and the war in Ukraine have all contributed to global inflation. While inflation may no longer be "transitory", the factors driving inflation are having uneven impacts globally across regions and commodities. Now, central banks on both sides of the Atlantic are considering or already taking measures to combat inflation.

It remains an open question whether central bank action can overcome the supply-side volatility. Agustín Carstens, general manager of the central bank umbrella body the Bank for International Settlements (BIS), stated that whether inflation "becomes entrenched" will depend on how quickly central banks act and "how permanent these shocks are".

Similarly, USDA stated in its most recent Food Price Outlook that inflation going forward will depend on the net impact between upward price pressure from the war in Ukraine and downward price pressure from tighter monetary policy. USDA currently forecasts US food price inflation in 2022 between 7.5% and 8.5%.

So far, interest rate increases in the US appear to have reduced inflation expectations in commodity markets, leading to a drop in commodity prices. If this is sustained, this would be expected to provide relief on input costs and eventually consumer prices.

If lower commodity prices are not sustained, this will be an important risk to monitor going forward, particularly for companies with greater exposure to the food and energy sectors. This scenario could mean economic slowdown due to monetary tightening alongside persistent high commodity prices and input costs due to supply-side challenges.

Posted 30 June 2022 by Lee Bridgett, Analyst, Food Retail and Manufacturing, S&P Global Commodity Insights



This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.

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