Food Price Inflation in Eurozone - From Page 57 ECB Bulletin December 2007

In Its December Monthly Bulletin, the European Central Bank says that the rise in global food prices has already led to notable increases in food prices in the Eurozone, at both the producer and the consumer level. The producer prices of food products and beverages rose by 7.5% in annual terms in October, compared with a rate of 2.2% on average in 2006. At the consumer level, the annual rate of change in HICP processed food excluding tobacco rose to 4.0% in October, up from 1.6% in 2006. By contrast, unprocessed food prices, which are traditionally more volatile, seem to have been less affected by the recent developments in global food prices so far. The impact of global food prices on consumer prices in the Eurozone is also evident from a detailed breakdown of prices by product and category. For example, within the HICP (Harmonised Index of Consumer Prices) processed food component, the prices of bread and cereals as well as of milk, cheese and eggs rose particularly sharply in October. These items have a combined weight of around half of the total processed food component excluding tobacco. Anecdotal evidence suggests that the recent price increases in dairy products may also reflect the specificities of the formation of milk prices in some European countries, in addition to the price increases in global markets of animal feed and other input costs. The ECB says that although food prices at the producer and the consumer level have risen in all Eurozone countries in recent months, the extent to which the global food price shock has been transmitted to individual Eurozone countries has varied significantly. For example, the annual rate of increase of HICP processed food excluding tobacco was slightly above 11% in Slovenia in October, the highest rate within the Eurozone. In the same month, Belgium, Germany (5.2%), Spain (6.8% and Austria also saw sharp annual price increases in this component of between 5% and 7%. By contrast, inflation for processed food excluding tobacco in France ( 1.3%) and Finland (1.1%) was significantly below the Eurozone average of 4.0%. Ireland's annual increase in October was 3.8%. The Bulletin says that a number of factors are behind the diverse food price developments across countries. Retail food markets are traditionally segmented across countries. In this respect, differences in market structures and competitive conditions in the retail and distribution sectors are likely to explain the diverse reaction of retailers’ profit margins across countries to a common external shock and therefore account for most of the difference seen in consumer food price inflation across countries. In countries where food price increases have been relatively contained, it appears that, in the context of high competition among retailers, profit margins may have acted as a buffer cushioning the steep increases in global food prices. Moreover, if the underlying economic conditions in a certain country are perceived to be weak, retailers may be reluctant to fully pass on high increases in food prices. Additionally, fixed periods for the negotiation of prices between suppliers and retailers may have also delayed the pass-through in some countries. In Germany, there is intense price competition among supermarkets, which has likely reduced the scope for rises to be absorbed through lower profit margins. By contrast, in countries where food price increases have been more considerable, it seems that retailers’ profit margins have not acted as a buffer. In some cases, this might be due to the fact that food retailers operate in an environment of compressed margins. Under these conditions, input price shocks tend to be passed on to consumers more quickly. In some other countries, a lack of competition in some food market segments, in a context of robust underlying economic activity, may have also resulted in a quick and, in some cases, stronger pass-through to consumers. Further ahead, the ECB says that outlook for both world and domestic food prices remains highly uncertain. Although the supply of agricultural products should eventually respond to the increase in demand, the catch-up period may be more prolonged than currently envisaged. Moreover, food price developments depend on a number of factors which are difficult to predict, including technology advances and possible changes in energy policy. Hence, risks in the medium term also seem to be on the upside.

Inflation rates in %, measured by HICPs

Source: Eurostat p = provisional : = data not available

Note: No November data for annual inflation in the USA were available in time for publication.

Eurozone inflation rates in % for main components, measured by HICPs

Source: Eurostat * FoodAlcTob = Food, alcohol and tobacco p = provisional

Eurozone sub-indices with most important impacts

Source: Eurostat p= provisional

Measures of inflation

The annual rate measures the price change between the current month and the same month of the previous year. This measure is responsive to recent changes in price levels but can be influenced by one-off effects in either month.

The 12-month average rate⁴ overcomes this volatility by comparing average Harmonized Indices of Consumer Prices (HICPs) in the latest 12 months to the average of the previous 12 months. This measure is less sensitive to transient changes in prices.

The monthly rate compares price levels between the two latest months. Although up-to-date, it can be affected by seasonal and other effects.

The impact of a particular component measures the change in the headline inflation due to the inclusion of that component in the HICP. The impact takes account of both the weight and whether the inflation for that component is higher or lower than the all-items inflation rate. For example, the impact of ‘tobacco’ is equal to the difference between the all-items inflation rate and the rate for ‘all-items excluding tobacco’. Impacts are not strictly additive.

HICPs designed for international comparison

Harmonized Indices of Consumer Prices (HICPs) are harmonized inflation figures required under Article 121 of the Treaty of Amsterdam (109j of the Treaty on European Union). They are designed for international comparison of consumer price inflation. The focus is on quality and comparability among the indices of different countries as well as on their relative movements.

Price changes as measured by the HICPs, the Monetary Union Index of Consumer Prices (MUICP), the European Index of Consumer Prices (EICP) and the European Economic Area Index of Consumer Prices (EEAICP) are used as measures of inflation in the Member States, in the Eurozone, in the European Union, and in the European Economic Area.

The MUICP is used by, among others, the European Central Bank (ECB) as a main indicator for monetary policy management for the Eurozone .

The Member States’ HICPs are supplied by the National Statistical Institutes; the MUICP, EICP and EEAICP are compiled by Eurostat. The HICP is computed as an annual chain index allowing weights to be changed each year. HICP aggregates are calculated as weighted averages of the HICPs using the weights of the countries and sub-indices concerned. The weight of a country is its share of the household final monetary consumption expenditure in the Eurozone total. For the MUICP this is expressed in euro, for the EICP and the EEAICP it is expressed in purchasing power standards. The MUICP is treated as a single entity within the EICP and EEAICP starting from 1999.

1. Eurozone inflation is measured by the MUICP (’Monetary Union Index of Consumer Prices’ as defined in Council Regulation (EC) No 2494/95 of 23 October 1995) which is the official Eurozone aggregate. The Eurozone initially included Belgium, Germany, Ireland, Spain, France, Italy, Luxembourg, the Netherlands, Austria, Portugal and Finland. Greece was included from 1 January 2001, and Slovenia from 1 January 2007. New Member States are integrated into the MUICP using a chain index formula.
2. The MUICP flash estimate for November 2007, published on 30 November 2007, was 3.0%.
3. EU inflation is measured by the EICP (’European Index of Consumer Prices’ as defined in Council Regulation (EC) No 2494/95 of 23 October 1995) which is the official EU aggregate. The EU included 15 Member States until 30 April 2004, 25 Member States from 1 May 2004 until 31 December 2006 and 27 Member States from 1 January 2007. Bulgaria and Romania have been Member States of the EU since 1 January 2007 and have been included in the calculation of the EU inflation since January 2007. New Member States are integrated into the EICP using a chain index formula.
4. Measure used to determine price stability in Convergence reports of 1998, 2000, 2002, 2004, 2006 and 2007 by the Commission to the Council.
5. In October 2006, Italy changed its price collection period. Collection is now taking place between the 1st and the 21st of the reference month. Until September 2006 the collection period was between the 16th of the previous month and the 15th of the reference month.
6. Data for the United Kingdom for November 2007 were not available in time for publication. Due to this fact, EU and EEA totals were calculated using Eurostat estimates.