France has largely escaped the surge in European processed food prices that has heightened inflation fears at the European Central Bank – while German and Spanish consumers have borne far more of the brunt, according to a study published by the bank on Thursday.
The impact of the global food price “shock” varies significantly across the 13-country eurozone, the ECB study concludes – adding to uncertainty about the economic outlook.
The ECB looked at prices of processed food, including bread, cereal and dairy products, as a guide to the impact of higher global food prices.
Surging eurozone inflation, which hit 3 per cent in November, led the ECB to hint last week that it might yet increase its main interest rate from the current 4 per cent – despite the global credit squeeze.
The Frankfurt-based institution aims to keep inflation “below but close” to 2 per cent.
Reiterating the upside risks to overall inflation, which has also been lifted by high oil prices, the ECB’s monthly bulletin yesterday noted that financial market prices implied a “significant” rise in longer-term inflation expectations since the start of the year.
However, such data could have been distorted by financial market turmoil, and overall professional forecasters’ expectations had remained “broadly unchanged”, even if the risks of inflation rising above 2 per cent had increased.
France’s relatively mild experience with processed food inflation is puzzling, given rising public concern about increasing living costs.
These concerns were underlined yesterday when the country’s annual inflation rate was shown to have risen to 2.6 per cent in November on a European Union-harmonised basis, the highest recorded for 3½ years, although this was largely because of higher fuel costs.
According to the ECB bulletin, French processed food prices were rising at an annual rate of just 1.3 per in October.
Finland, at 1.1 per cent, saw even more modest growth. But Spain and Germany saw processed food prices rising at annual rates of 6.8 per cent and 5.2 per cent.
The ECB suggested prices were likely to rise less in countries where retailers were prepared to use profit margins as a buffer, especially if fears about the economic outlook made them reluctant to pass on price increases.
In Germany, by contrast, fierce price competition, especially among discount supermarkets, has probably reduced the scope for rises to be absorbed through lower profit margins – and German economic optimism remains upbeat.
The ECB expected food price inflation to increase in the short term before falling back towards the historical average.
It believed the supply of agricultural products would catch up with demand, but stressed the unpredictability of prices.