Food inflation is finally decreasing, but is this change synonymous with affordable prices?
In many places in the world the ever-increasing inflation is finally cooling down, nonetheless, food prices remain exorbitant. How does this affect the average consumer?
Aside from the much straight-forward consequence that consumers’ purchasing power is rapidly and tangibly decreasing, it is also interesting to analyze more in depth other less evident effects that make the people urge for a change in food prices.
Many recent events such as the Covid-19 global pandemic, the Russo-Ukraine on-going conflict, and the increasing rate of natural disasters, have put this sector in crisis.
To commence this analysis, it is useful to take a closer look at the recent consumer patterns in the United States and Italy.
In the US, the Bureau of Labor Statistics reported that food inflation increased by 4.9% in July 2023, with respect to last year. Moreover, it was 10.9% higher in July 2022, than the same period in the previous year. It is then a fateful reality that the individual economic situation of Americans has significantly worsened: according to Forbes magazine, around 72% of families cannot cover an unexpected $400 bill, compared to only 61.8% in 2022. Similarly, around 40% of households state that when buying groceries they browse multiple supermarkets in order to find cheaper products, given their situation. This is significantly high, if we compare it to the 31% of people who answered the same the previous year. The increasing prices lie way beyond people’s perception, as it is also reported that the price of a typical basket has risen 40% since 2020.
If we take a look at the European Union, we can observe that inflation has dropped to 5.3% in July 2023. Instead, food prices– specifically those of groceries and unprocessed food– increased to 10.4%. Thus, one can observe a clear pattern: core inflation is happening at a slower rate, while food inflation continues increasing at a constant or higher pace.
In particular, Italian households perceive that they can buy around 4.7% fewer products and spend 7.7% more money than last year when buying groceries.
Moreover, another alarming statistic reports that it is expected that consumers’ purchasing power will decrease further by around 16%, as a result of inflation fluctuation between 2022 and 2025. This percentage is dramatically higher than the expectations for 2016-2019, which was only 1.5%.
When comparing the situation in the two markets, there are three relevant takeaways to take into analysis. The first and more obvious pattern is that while core inflation is reaching desired levels, food prices still represent a burden for the average consumer. Secondly, people’s perception in regard to their personal finances is increasingly pessimistic, as shown by their consumption behavior. Finally, it is paramount to take into account that low and middle-income families, together with small businesses, are those who suffer the most from such a crisis. Although it would represent a leap in logic stating that food inflation is going to slowly terminate the middle class, deepening the poverty of the lower classes, it is also important to recognize that the unaffordability of food worsens existent crises and calls for the attention of an overwhelmed state.
Faced with such a critical situation, in the United States, the Federal Reserve set interest rates at 4.3%, the highest recorded level in ten years. Moreover, the European Central Bank set interest rates at 3.75%, the highest for more than twenty years. Although set in an attempt to ease inflation, the high interest rates might put in danger individual consumers and small businesses. Indeed, we are already experiencing some of the consequences.
Although efforts to decrease inflation are beneficial in the long term, in the short term the current trends in the food industry reveal that a large part of the population is only able to cope with the rising prices by changing its consumption patterns, towards the low-cost end, rather than by lowering its demand in some other sectors.