This article was published here.
In recent years, many have felt their wallets squeezed by skyrocketing food prices. The economic fallout from the Covid pandemic, the war in Ukraine and other factors combined to create very high levels of food inflation. But recent data suggests the trend is changing, with food price increases slowing down, bringing relief to many.
Food inflation has decreased
In September, inflation decreased for the fourth consecutive month. While recent years have seen food inflation reach very high levels, above 10% in many cases, more recent data suggest the rate of food inflation has come down a long way from its peak. Thanks to factors including falling energy prices, the consumer price index has decreased significantly, falling to a new low of 0.2% in the Netherlands versus one year ago.
It is important to understand that this does not mean food prices are falling. Unfortunately, it is unlikely food prices will decrease. Instead, what we are seeing is a drop in inflation, which means food prices are still rising, but at a much slower rate than they were last year. The European Central Bank has a 2% inflation target, which means it aims for prices across the EU economy to increase by roughly 2% per year. Since average earnings should increase by more than 2% in a typical year, that should mean, in theory, our purchasing power grows over time. But with food inflation being as high as it has been recently, this was not possible, leaving many struggling to feed their families.
Does this latest news mean we are in the clear? While food inflation slowing down is undoubtedly good news, we are not out of the woods yet. The rate of inflation could pick up again in the coming months. Major world events like wars or natural disasters which have knock-on effects can occur almost overnight, as recent tragic events in the Middle East have shown. Either way, we are unlikely to return soon to the pre-Covid environment of low interest rates and low inflation, because of the changed global economic landscape.
Could food inflation go up again?
Still, there are some things within our control to help keep food inflation low. For instance, changes in laws or industry norms can impact prices. Being part of the EU, the Netherlands is subject to European laws, some of which affect food. Upcoming EU legislation such as the ‘Farm to Fork’ agricultural measures and the European Green Deal’ could affect food prices if they alter the cost of food production and if those changes filter through to consumers. Regulations are crucial to protect the environment, and they can also present both opportunity and risk when it comes to our wallets.
The EU says the European Green Deal could mean lower food prices, which would benefit those struggling with their finances. However, there is always the possibility of ill-considered legislation having the opposite effect. The EU’s Due Diligence Proposal, for example, is set to crack down on key food imports into Europe such as palm oil. Because it is used in countless products from food to toiletries and alternative oils are considerably costlier, excluding palm oil from the European market could increase food prices.
This move is fuelled by concern about palm oil causing deforestation. In fact, it is much more land-efficient than other oils like olive and rapeseed, which means palm oil production cuts down fewer trees to produce the same amount of oil. Land efficiency is also the reason for its cheapness. Forcing food manufacturers to switch to less efficient, more expensive ingredients could lead to increased deforestation in their supply chains. Cracking down on palm oil could therefore hurt both the planet and our wallets. More research seems necessary to agree on the best strategy to combat deforestation, while not raising prices too much.
Celebrate cautiously
While we can and should celebrate food price increases slowing down, it is crucial we hold our nerve to ensure that food inflation does not bounce back if we take our eye off the ball. For the time being at least, the poorest in society – some of whom have had to choose between heating and eating in recent years – may finally enjoy some financial respite if food inflation remains low.