The agri-food business consultancy said sudden changes for the worse in harvest prospects forced changes in global agricultural prices, which can have a dramatic impact on retail food inflation.
EFFP’s current predictions are that food inflation will continue to fall through 2012 and will end the year close to between 2–3%. It will fall a little further in the early part of 2013, based on figures from the consumer price index (CPI).
“Both the CPI and, the alternative measure of inflation, the Retail Food Price Index [RFPI] are firmly heading towards the government’s target rate of 2%,” according to EFFP’s report: ‘Food Inflation Outlook’. Both indices reflect costs such as labour, transport and materials, which affect the costs of processing, manufacturing and retailing food, along with agricultural commodity prices.
Commodity prices
EFFP said prolonged reductions in world commodity prices would be required to pull the rate of increase in the RFPI below the general rate of inflation. “Although global agricultural prices, after their sharp increases in 2008, have displayed greater volatility over recent years, they are very unlikely to fall back to their pre-2008 levels in the foreseeable future,” according to the report.
If the annual, or underlying rate of increase in food prices is subject to changes in global agricultural prices, it is also subject on a seasonal basis to the variations in fresh fruit and vegetable prices. “Indeed, it is the weather-induced fluctuations in seasonal food prices that help explain the monthly volatility of retail food prices,” wrote EFFP.
Fruit and vegetable prices
Looking forward, the prices of products that are characterised by random fluctuations are impossible to forecast, it continued. In these circumstances, the best possible forecast is to assume that fresh fruit and vegetable prices will remain more or less at their current levels until next year.
EFFP noted that lowering of the inflation rate has occurred despite upward pressure exerted by energy and food inflation.
It also said the largest influence on the favourable movement in the CPI was the impact of the hike in VAT at the start of 2011. But the lacklustre performance of the economy was another influence.
“Consumer demand is heavily constrained by the high level of unemployment, a shift to part-time working and wage settlements that fall short of the general rate of inflation,” according to the report.