All prices go up for everyone. This statement is a no-brainer since February 2022, when Ukraine declared war. However, there are increases that affect more than others, such as the prices of basic foods. The so-called essential products have had increases in Spain that even exceed 40%.
Products such as flour, butter or sugar, reached increases of 37.8%, 34.1% or 43% year-on-year respectively in October. The logic of inflation in these products seems simple: if energy prices increase, production and distribution costs will increase, thus adding to consumer products. Therefore, the solution should be simple: if energy prices drop, a company for which Spain has spent more than 35,000 million euros, everything else will become cheaper.
The World Bank (WB) warns that, at least for a few years, this will not be the case. In statements to this newspaper, representatives of the entity assure that “as long as energy prices are high and on the rise, food and nutrition will be in even more danger.”
Although the institution expects energy prices to decline by 11% in 2023 and another 12% in 2024, they will remain above their pre-war levels. Specifically, the international organization estimates that they will continue to be 50% higher than the 5-year average until 2025.
The effects of food inflation in Spain are noticeable. With a large part of energy costs moderating, the food group is the main inflationary factor in the CPI and is being decisive in establishing resistance for prices to moderate.
The effects are felt in the pocket of the Spanish. CaixaBank Research stated in its latest monthly report that card expenses in September have slowed down to 7% in September. Given the increase in the prices of basic products, household spending has increased by 18%, in interannual terms.
Food, down?
World trade is partly blocked. Russia and Belarus, now sanctioned by the EU, are fundamental pieces for the production of fertilizers, since they add up to 40% of the potassium traded in the world, while Russia alone is responsible for 25% of the global nitrogen trade.
Those that do go to the international market must first go through a war zone and with restrictions on exports, through the Black Sea. All these elements can only mean one thing – more expensive products.
The professor of Economics at the Pablo de Olavide University, Manuel Hidalgo, affirms that the restrictions limit supply and stretch all prices, especially some fundamental ones for agricultural production, such as fertilizers and fuels.
The situation of the war is fundamental for the evolution of prices. The fertilizer industry is electro-intensive and the employers’ association Fertilizers Europe already warned in August that European production capacity has been reduced by more than 70% due to record natural gas prices, which account for 90% of variable costs of that production, which prevents manufacturers from competing in the market.
For Hidalgo, high prices “will stabilize in some products”, although he clarifies that there are also other factors that can cause the opposite: “Food production in other parts of the globe is increasing, the price of crude oil has moderated a lot, which The same with gas and, if it rains and we don’t have a drought, we will have a price reduction phase. That the products fall to levels of a year ago is improbable”.
Despite all of the above, the World Bank’s cost forecasts are downward, albeit with nuances. In 2022 the price of food will grow by 18%, a rise that will drop by 6% in 2023 and which, according to Bank forecasts, will stabilize in 2024. However, he warns that the balance is precarious and there are many factors that could alter forecasts.
For example, future interruptions in exports from Russia or Ukraine and further increases in energy prices, which could put upward pressure on grain and oil prices.
The World Bank concludes that if energy and fertilizer prices do not moderate in 2023 and 2024, as expected, food prices could rise “markedly.” All this without taking into account natural factors that negatively influence prices, such as bad harvests, storms, drought, etc.
But it is not only Spain. Almost 87% of high-income countries experience high levels of food inflation.
In real terms, food price inflation exceeded headline inflation in 90% of the 156 countries estimated by the World Bank (see heat map). Although there is only one European country on the list of the 10 states with the highest food inflation (Hungary) so, surely, severe food insecurity will not directly affect the almost 450 million inhabitants of the European Union.
However, on the planet, which added 8,000 million inhabitants last week, things are not like in developed countries.
Food rose 2.3% in October, but showed a strong increase of 15.4% in year-on-year terms, the highest level since January 1994. The World Bank assures that, disaggregating the rise in general inflation, the price of food has grown by 2.7% in real terms. In other words, leaving aside the increases in other products, food alone grew by 2.7%.
Interest rates also affect what we eat
risks. Inflation and rising interest rates can also create inflationary risks. The World Bank ensures that these policies put upward pressure on the cost of labor and materials used to produce, store and transport basic products. As central banks respond to high inflation by raising interest rates, the cost of global borrowing will rise, constraining investment in agricultural commodity production and global supply chains.
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