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Rising agflation attracts the attention of the European Central Bank

The contribution of rising food prices to the revival of inflation in the eurozone has attracted the attention of the European Central Bank (ECB) in its latest monthly bulletin for December 2007. Eurostat’s flash estimate of inflation for November 2007 on an annualised basis is 3%, compared to an average growth rate of 1.9% in the first three quarters of 2007. This increase has been driven by recent strong energy and food price increases.

This leads the ECB to ask whether further liberalisation and reforms in the EU agricultural markets would benefit European consumers in terms of lower prices. It concludes:

Against the background of a marked increase in international food prices, further liberalisation and reforms in the EU agricultural markets are particularly important. Reforms would help to enhance market efficiency and benefit European consumers in the form of lower prices. In order to allow consumers to profit from lower farm-gate prices, adequate competition in the downstream sectors (food processing, retail trade and catering) and compliance with Single Market provisions are necessary. The successful conclusion of the Doha round of world trade negotiations should also help to improve the functioning of global trade in general, and of agricultural markets in Europe and worldwide in particular.

However, its own figures on consumer price inflation for food products indicate that there is a wide dispersion in the extent to which higher producer prices for food products have been passed through to higher consumer prices. The producer prices of food products and beverages rose by 7.5% in annual terms in October, compared with a rate of 2.2% on average in 2006. At the consumer level, the annual rate of change in HICP processed food excluding tobacco rose to 4.0% in October, up from 1.6% in 2006 (HICP is the Harmonised Index of Consumer Prices and is the common methodology used to measure inflation in the eurozone). By contrast, unprocessed food prices (which include meat, fish, fruits and vegetables), which are traditionally more volatile, appear to have been less affected by the recent developments in global food prices so far. The price increases for bread and cereals, and for milk, cheese and eggs, have been particularly sharp rising to 5.4% and 7.6% respectively on an annualised basis in October.

However, there is considerable national dispersion around this average 4.0% figure. Apart from Slovenia which is a bit of an outlier with processed food inflation of 11.2% in October 2007, other countries which experienced high rates include Spain (6.8%), Austria (6.2%) and Germany (5.2%). On the other hand, processed food inflation remains relatively subdued in Finland (1.1%), France (1.3%) and the Netherlands (2.8%).

The ECB suggests these differences reflect differences in market structure and competitive conditions between national retail and distribution sectors though it is not always easy to distinguish cause and effect. In some countries, retailers have been prepared to let profits absorb some of the increase in costs in a context of high competition. Competition may thus be more limited in countries with high rates of food price inflation, although paradoxically this could also be the outcome in countries with a competitive food sector with compressed profit margins (such as Germany with its hyper-competitive discount sector) which is simply not in a position to take a further profits squeeze.

Thus whether consumers would really benefit from lower CAP prices cannot be seen in isolation from the market structure and competitive pressure in the retail and distribution sector.

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