It’s December 2022. For about a year and a half, consumers around the world have been experiencing sky-high prices for nearly all everyday necessities. The culprit is inflation, i.e. the broad increase in the prices of goods and services, resulting in a loss of purchasing power.
While general inflation in the European Union was at 0.5% in 2020, it’s now over 10%. In the US, it was 1.23%, worldwide 1.92%.
Globally, the inflation rate is now 8.75%.
Food prices play a major role in global inflation, they’ve been among the largest contributing categories to inflation in recent months. Along with energy prices, they have risen the most. Food prices went up 13% in September 2022 from the same time a year ago, the largest 12-month increase in more than 40 years.
Within this category, the price of certain products has risen particularly sharply in the past year, e.g., butter and margarine (by 32%), eggs (by 30%), and flour (by 24%).
But what is it that has made food so expensive? Is it still the pandemic disrupting supply chains? Or the Russian invasion of Ukraine? Are high energy and transportation costs to blame? Or is corporate greed behind it?
In this article, BudgetBakers’ financial experts address these questions. As part of this, they also take a look at our customers’ spending, providing an overview of how much the average consumer spends on food – per continent. If you additionally want to learn how to reduce your grocery bill, read our tips on how to save money on food in times of inflation.
How Much Has Food Spending Increased?
Increased food prices are clearly reflected in the spending of our customers. In an anonymous data analysis, we looked at how much our customers spent on groceries in the past 12 months from October 2021 to October 2022. Taking a look at each continent individually, we gained an interesting overview of food inflation worldwide.
As you can see in the chart above, consumers spent more money on food in almost all parts of the world over the past 12 months. The biggest increases were in Australia and New Zealand. Here, people were spending an average of $315 in October 2021 – a year later, it was $370. North America experienced a similar pattern, with spending rising from an average of $275 per consumer in October 2021 to $295 in October 2022.
In South America and Africa, food spending has also increased by an average of $20 per consumer over the past 12 months. Only in Europe did spending per consumer decline slightly at the end of 2022, after fluctuating significantly over these 12 months.
These increases and fluctuations can’t be attributed to one reason. At times, high fuel prices have caused spending to skyrocket; at other times, it has been climate change-related droughts; and meanwhile, the war in Ukraine has had a major impact on grain production and supply chains. Let us explain the root causes in more detail below.
The Reasons For Rising Food Prices
Rising inflation is taking a heavy toll on households, and high prices are particularly noticeable when shopping at the grocery store. Consumers have been paying significantly more for everything from meat to cereals to fruits and vegetables.
For one, increased gas prices and labor shortages are driving up costs for businesses. In addition, the war in Ukraine has disrupted exports of wheat, sunflower oil and other products, straining global food supplies and driving up prices. And climate change-related issues such as droughts and floods have further reduced crop yields. This has resulted in massive price increases all around the world.
|Country||Food Inflation Rate|
One of the reasons for rising grocery prices is a growing demand. Unlike discretionary items, consumers can’t just stop buying food when prices rise. So to save money, they are opting for cheaper options. Producers, grocers and restaurateurs have found that consumers are indeed swapping the more expensive products for more affordable ones, and are now offering more chicken and fewer beef steaks, for example.
But most importantly, people eat less out and decide to pack lunches or eat breakfast at home. In the US, people ate about 82% of their meals at home before the pandemic; this figure rose to 85% during the pandemic and hasn’t changed since then. Thus there’s a greater demand for food from grocery stores, also because people stocked up on food for fear of food shortages.
So not only did the virus change people’s consumption patterns during the peak phase of the pandemic, it continues to have an impact on people’s choices today. In the next chapter, we’ll explain what’s driving this.
One reason for rising food costs is greater demand. A second is supply chain disruptions. Economists argue that much of the rise in food prices has been a result of lingering pandemic-era supply constraints.
During 2020 and 2021, many countries imposed border closures which led to disrupted supply chains across the world, mainly when there was a fear of transmitting the virus by food. As a result, many countries faced severe food supply shortages due to border closures from or to the food supplier countries.
In the meantime, multiple lockdowns resulted in panic-buying and significant demand fluctuations. Billions of people were asked to stay at home, resulting in substantial purchase behavior changes. People began to buy and store products that they otherwise wouldn’t have bought in those quantities. The unexpected changes in supply and demand plus border closures created significant disruptions and delays across the world.
On top of that, labor shortages resulting from the COVID pandemic have reduced the availability of workers to grow, harvest, process and distribute food. That is another universal cause of food price rises.
Gas and Transportation Cost
It’s not just increased demand and hoarding during and after the pandemic that has been driving up food prices. Nor do supply chain disruptions and labor shortages alone explain today’s prices. High fuel and gas prices also play a key role in food price trends.
Why? Because increased gas prices have made it more expensive for farmers and retailers to transport food products around the world. Western countries imposed import bans on Russian products, including oil and gas, due to the war in Ukraine. As a result, energy prices increased by 23.8% between August 2021 and August 2022. These higher energy prices aggravate the already high costs of food production and transportation triggered by the pandemic.
Also fuel prices have continued to be a major component in inflation figures. While gasoline prices have declined over the last 3 months, diesel prices have remained high. Diesel engines power about 75% of farm equipment and transport 90% of farm products. But diesel prices are a major component when it comes to growing and transporting food around the world. As long as these costs don’t go down, the price of food will certainly not go down either.
The War in Ukraine
Global food prices have surged 65% since the start of the Covid-19 pandemic and by 12% this year alone since the start of the Russian invasion of Ukraine, according to data from the United Nations’ Food and Agriculture Organization. The war has particularly hurt supply chains, and caused a spike in energy prices, driving fertilizer and shipping costs higher.
Russia’s invasion of Ukraine has also tightened global food supplies. Ukraine used to be a major producer of wheat, sunflower oil and other foods. Since the war, however, production of these items has been massively disrupted. This is because Russia has bombed the Ukraine’s infrastructure in recent months to the point that growing and transporting food has been massively impacted. In addition, Russia has long blocked the export of agricultural products across the Black Sea, slowing exports to many countries around the world.
Another contribution to food price increases are soaring fertilizer costs. Farmers have been struggling with rising fertilizer costs since as early as the beginning of 2021. Prices already rose by more than 300% before the war in Ukraine. And these higher prices on the production side have forced farmers to increase their crop prices .
Western sanctions on Russia are now exacerbating the already existing fertilizer shortage. Russia is a major exporter of fertilizers, accounting for almost 30% of global fertilizer exports.
Climate-related issues have also increasingly hit the food supply. A drought in California for example has led to low crop yields for fresh produce. Summer crops such as tomatoes and onions have withered, and leafy vegetables grown in winter could also be affected by the climate. With less food available on the market as a result, prices could continue to skyrocket.
A report from the International Panel on Climate Change concluded that the industries of agriculture, forestry, fisheries, and aquaculture are already struggling to meet demands. Deteriorating surface ozone, caused by greenhouse gas emissions, increasing temperatures, and warmer, drier conditions all have an impact on the global food production. Food production and cultivation areas are declining, leading to imbalances in flowering and pollinators. At sea, floods and heat waves cause production losses and disrupt fish stocks, reducing food capacity even more.
The pandemic, high energy prices, the Russian attack on Ukraine and climate change are all contributing to higher food prices. A final factor that you should know about is greed for profit that keeps prices unnaturally high.
American professor Robert Reich recently shared his knowledge on corporate greed in a guest post in The Guardian. He wrote that corporations are using rising costs as an excuse to increase their prices even higher, resulting in record profits.
He argues that corporations have the power to raise prices without losing customers because they face so little competition. That’s particularly true for grocery prices. They’re through the roof because “just four companies control 85% of meat and poultry processing. Just one corporation sets the price for most of the nation’s seed corn. And two giant firms dominate consumer staples.”
To solve this problem, policymakers should take direct action against profit-price inflation instead of relying solely on central banks to raise interest rates and place the burden of fighting inflation on average workers.
The Dangers of Food Inflation
Food inflation not only makes our food purchases more expensive, but also poses many other risks. Rising prices on international markets threaten food security. The problem is most pressing in low-income countries.
Here, the rising cost of food imports is taking a heavy toll on personal income, as food accounts for about half of the basket and 20% of imports, according to the International Food Policy Research Institute. In addition, increases in international staple food prices account for about 40% of total consumer price increases in low-income countries. A figure much higher than in middle-income countries.
The Famine Early Warning Systems Network (FEWSNET), FAO, and Welthungerhilfe also warn of hunger crises, particularly in Ethiopia, South Sudan, Yemen and Nigeria. The combination of climate change, COVID-19 and wars could drive millions of people into hunger. Countries where climate disasters and conflict already exist are more likely to experience greater price increases because value chains break down more easily there.
But it’s not only developing countries that are suffering from rising prices, rich western countries are also affected. When consumers pay more for food, they spend less on other consumer goods, which has serious implications for the global economy. Morgan Stanley estimates that private consumption in the U.S. will decline by 1% following a 20% increase in food prices. Similar forecasts are made for the European Union and several Asian countries.
Inflation has a strong impact on the global economy. The cost-of-living crisis, tightening financial conditions in most regions, Russia’s invasion of Ukraine, and the lingering COVID-19 pandemic all weigh heavily on the outlook. Global growth is forecast to slow from 6% in 2021 to 3.2% in 2022 and 2.7% in 2023. This is the weakest growth profile since 2001 except for the global financial crisis and the acute phase of the COVID-19 pandemic.
Increases are a result of supply constraints driven by difficult-to-predict variables — high energy prices, geopolitics and weather — but analysts with Morgan Stanley Research are forecasting that food prices will peak in 2022 and start falling in 2023.
The Bank projects food prices to stay high for the remainder of 2022, but to fall 11% below current prices in 2023.