Summary of easing food inflation and consumer spending
- Commodity prices for meat dairy and sugar are declining, but unevenly
- Falling energy costs reduce pressure for further retail price rises
- Overall food inflation may persist despite select products showing price relief
- Consumer confidence remains low with only fourteen percent expecting slowdown
- Weak sentiment shifts shoppers toward cheaper foods limiting premium brand sales
Food inflation is something of a political football. Leaders around the world have come to power promising to combat the high price of food, which has tormented consumers everywhere.
While shoppers have suffered, so has industry. High prices, often put in place by food companies reluctantly in reaction to market pressures, have in some cases caused sales to dwindle. Consumer confidence in many markets is at near-rock bottom.
But now, key commodity prices have begun to ease. Soft commodities in particular, such as cocoa, have started to fall. Nevertheless, others, including beef, are still rising. Falling prices are clear, but sporadic.
Such easing of global food prices could affect some products on the shop floor. But if such easing is to increase sales, consumer confidence is key.
What could cause food inflation to ease?
Higher than usual prices at a retail level are usually the result, at least in part, of price increases along the supply chain.
Yet prices of many major food commodities are now easing. According to the UN’s Food and Agriculture Organisation, the prices for key commodities have been declining, including meat (0.4% from December), dairy (5% from December) and sugar (1% in January).
Food inflation overall will still go up, but, says ING Bank, prices on some staple products, including milk, butter, sugar and potatoes, may decline for consumers themselves.
Recent declines in the price of cocoa in particular could have an effect. In an earnings call last week, snacking giant Mondelēz International said that, due to cocoa’s decline, it was unlikely to implement further price increases on its products.
Alongside the fall in commodity prices, the decline of the price of energy may have an impact. Energy normally has a significant impact on the price of other commodities, due to its key role in supply chains.
Finally, the rise of real wages may shift consumer purchasing power, if not actually put prices down. According to ING, real wages in Europe have seen a modest improvement.
Could an ease in food inflation affect sales?
Whether this easing of inflation will have any impact on industry depends on what consumers believe. If they remain cautious about spending, sales are much less likely to increase.
Indeed, according to research by ING Bank, this is likely to be the case. Currently, only 14% of respondents expect a slowdown of inflation.
Could this change if consumers actually see this slowdown happening?
“As long as households are cautious spending more, and continue to save a relatively large share of their income, it slows down the economy‚" says Thijs Geijer, sector economist for food and agriculture at ING Bank.
Despite certain positive economic factors, consumers still continue to save a significant portion of their incomes.
Low consumer confidence will shift which food products consumers buy, but not whether they are buying, stresses Tom Bundgaard, vice president for price forecasting at commodity analytics platform Expana. People still need to eat.
Therefore, many consumers will shift towards buying cheaper foods. Low consumer confidence will hit more expensive brands the most.
Whether or not food prices ease, consumer confidence is key to the increase of sales.
