The inflation is dynamiting the shopping basket in Spain. Oil prices have increased by 56% since the beginning of 2021, when the escalation of the general price level of food raw materials began, while the cereals have become more expensive by 17%, dairy and eggs16%, and the meat, 10%. The war in Ukraine has only exacerbated this trend, which shot up the annual rate of inflation in July in Spain to 10.8%, to the level of 38 years ago.
“The rise in prices of food raw materials that is taking place on a global scale is having an intense impact on consumer prices of these products faced by households”, according to the report ‘The increase in the prices of food raw materials and their transfer to consumer prices in the euro area’, published by the Bank of Spain.
The analysis, whose authors are Fructuoso Borrallo, Lucía Cuadro-Sáez and Javier J. Pérez, delves into the different food groups and reveals that price increases are being “very widespread and intense” for all foods. In June, the price of oil in the euro area increased by 29% year-on-year, and cereals and coffee by 11%, while dairy and eggs, and meat made it around 12%. In the same month, in Spain, the price of oil increased by 37% year-on-year, and cereals, coffee, dairy products and eggs, and meat did so by around 16%, 11%, 16% and 10 %, respectively.
As a consequence of these dynamics, since January 2021, in the euro area, oil is now 34% more expensive, and cereals and dairy products and eggs are 12% and 13% more expensive, respectively. “In Spain, prices have increased most notably since the beginning of 2021”: 56% for oil, 17% for cereals, 16% for dairy products and eggs, and 10% for meat.
Greater weight and contribution
In conclusion, the escalation in the prices of food raw materials that has been taking place globally since the beginning of 2021 “is having an impact on consumer prices in the euro area and in Spain, and explains a significant part of the increase in inflation in general in recent quarters”.
The weight of food in the shopping cart largely determines the heterogeneous impact of the increase in the price of food raw materials in different countries. While in the euro area as a whole this weight stands at 17% and food has contributed 0.9 percentage points to the increase in the harmonized index of consumer prices (HICP), on average, in the last three quarters, in Spain the weight rises to 22% and the average contribution has been 1.4 percentage points. According to the most recent information, corresponding to June, the contribution of food to the general inflation rate in Spain was 2.9 points, compared to 1.7 points in the Economic and Monetary Union.
The Bank of Spain estimates that a temporary increase of 10% in the rate of change in the prices of food raw materials will have repercussions in a rise in total inflation in the euro area (HICP) of about three tenths after 12 months.
According to the study, “the future evolution of food prices is subject to high uncertainty. Although the available forecasts, both from institutions such as the World Bank and from the food futures markets, point to a certain downward trend In the coming years, the continuation of the conflict stemming from the Russian invasion of Ukraine would continue to exert upward pressure on these prices, both direct and indirect.” An example has been the first shipment of grain from Ukraine to Turkey and then to Lebanon, which has influenced the decline in the price of wheat.
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According to the Bank of Spain, on the one hand, these countries are important producers of food raw materials, such as cereals, and their production and export capacities are significantly limited. In turn, the conflict is affecting the prices of energy and fertilizers, which are two crucial supplies in the production processes of agricultural activities.
Likewise, it points out that the increase in prices and the disruptions in the supply coming from Russia and the Ukraine, together with some adverse weather developmentsare leading some countries to ban or impose restrictions on exports of some food raw materials, which represents a additional tensioning of global food supply chains, with the potential to generate very persistent additional increases in international prices.