Food inflation is frying your purse. War in Ukraine is the cause

Your homemade stir fry has just become more expensive to cook with the price of vegetable oil jumping up as a result of Russia’s invasion of Ukraine.

A one-litre bottle of edible oil has risen by as much as €1 in some instances over a matter of weeks as exports from Ukraine, the world’s largest producer of sunflower oil, ground to a halt. This has pushed prices of sunflower oil and alternatives up.

It is a reflection of the food inflation that is biting hard into people’s pockets with an official from a supermarket chain telling MaltaToday, prices of all imports have risen “significantly” over the past three months.

“It is not just staple foods like oils and cereals that have skyrocketed but everything else, including services that we make use of,” he said.

Food, including alcohol and tobacco, accounts for 21.8% of Malta’s consumption basket, making it an important driver of inflation, according to Abigail Marie Rapa, senior economist within the Economic Analysis Department of the Central Bank of Malta.

According to an analysis she carried out of food inflation that was published in the CBM’s Outlook for the Maltese Economy released last Friday, the contribution of food prices to overall inflation as measured by the harmonised index of consumer prices (HICP) rose from 0.2 points in April 2021 to 1.6 points a year later.

“Food inflation in Malta has exceeded that of the euro area from April 2021 onwards. By April 2022, food inflation in Malta stood 1.2 percentage points higher than in the euro area,” Rapa wrote in her report.

Grocery bill getting heftier

Malta imports around 70% of its food products and is therefore particularly susceptible to developments in international food prices.

Inflation is a global phenomenon with the Food and Agricultural Organisation (FAO) Food Price Index for April showing an increase of 29.8% from a year earlier. The FAO index is a measure of international prices of a basket of food commodities, namely meat, dairy, cereals, oils and sugar. It shows that oils rose by 46.5% and cereals by 34.3%.

Rapa quotes from the latest EU trade data for February 2022, released just before the war in Ukraine started. Prices of cereals and feed for animals increased by 29.4% and 22.2% respectively, putting upward pressures on prices of cereals and meat in Malta.

Since then, prices have continued to increase exponentially as a result of the disruption of grain and sunflower oil exports from Ukraine and constriction of trade with Russia as a result of sanctions.

The household grocery bill has been getting heftier by the day. Today’s euro does not buy the same basket of goods it used to yesterday and this is also reflected in MaltaToday’s survey of concerns published today.

The cost of living, particularly food inflation, has jumped up to the top spot of concerns, more than doubling since March.

The consolation for Maltese consumers is that they have been spared the impact of higher fuel and energy prices as a result of government’s intervention to cushion the blow. Millions of euros in taxpayer money are being spent to keep electricity rates and pump prices stable.

But the rise in prices for raw materials and essential foodstuffs is also worrying restaurateurs.

Three in four industry respondents in an online survey by the Association of Catering Establishments (ACE) have complained about the increase in stock pricing seriously hindering the sustainability of the industry.

“When assessing the survey holistically, it is evident that sustainability is the major issue of concern and this is attributed mainly to the impact of the COVID-19 pandemic together with the sudden spike in the stock purchase pricing index as well as the recurrent problem of human resources,” ACE said when it released the findings on Friday.

Wage pressures

Inflation will create pressure on employers to increase wages. The Retail Price Index, which is used as a benchmark to calculate the mandatory increase in wages and pensions every January, was showing an annual increase of 5.7% in April. The main drivers behind the April increase were house maintenance costs and food.

At this rate, wages are very likely to increase anything between €6 and €8 per week next January, which will provide a tardy reprieve for workers and pensioners but could erode profitability in certain sectors still struggling to recover from the pandemic.

The European Central Bank (ECB) announced last week its intention to raise interest rates for the first time in more than 11 years next month as it tries to control soaring inflation in the eurozone.

The ECB said it would raise its key interest rates by 0.25% in July, with further increases planned for later in the year. It also intends to end its bond-buying stimulus programme on 1 July.

The latest eurozone inflation estimate was 8.1%, well above the ECB's target of around 2%.

The ECB's main policy interest rate is currently at -0.5%, which means banks pay a fee to keep their deposits with the central bank. The interest rate could be back at zero or above by the end of September, the ECB said.

Raising interest rates makes borrowing more expensive while it encourages consumers to save rather than spend. This will reduce wage growth and curb inflation but some economists have warned this could stifle investment and economic growth at a time of fragile recovery.

Inflation, growth and stir fry

Economist Clint Flores had been hoping the ECB will stave off interest rate hikes to avoid the impact on economic growth. In comments on his Facebook page dedicated to economic and political analysis he did not hide his disappointment with the ECB’s announcement.

“It is something I did not wish to happen [the ECB interest rate hike]. But it did. I hope it does not create a problem of lack of private investment because the problem [inflation] is coming from the supply side and not one caused by demand,” Flores wrote.

Inflation is primarily caused by high energy prices and supply chain disruptions, whether as a result of war or pandemic-induced port closures in China, things the ECB has no control over.

In a policy lecture hosted at the Goethe University on 25 May, Fabio Panetta, an ECB executive board member, noted that unlike some other advanced economies, the euro area is not facing a situation of excess domestic demand.

“Instead, the euro area is confronted with a war on its doorstep that comes on top of a series of negative supply shocks generated abroad. These shocks – above all the increase in energy prices – are creating sizeable and persistent upward pressures on near-term inflation,” he said.

However, by hitting real incomes, confidence and ultimately domestic demand, these shocks could derail the post-pandemic recovery, Panetta added.

“For now, given the exceptional level of uncertainty we face, we should normalise our monetary policy gradually, in line with the progressive adjustment that has inspired our action in recent months,” he told his audience.

That is what the ECB will start doing from next month as it seeks a balance between the more hawkish central bankers hankering for a much higher increase in interest rates and the more prudent ones demanding a slower approach not to disrupt growth.

It is unlikely that the ECB’s move will lower the price of vegetable oil bought at your local supermarket anytime soon. For the foreseeable future, the homemade stir fry will continue frying your purse.