Wednesday, December 14, 2016

The Euro-Area Survived The Oil Slump, Now It Faces Off With Food

Produce prices are turning out to be a bigger threat to inflation.

By Carolynn Look
December 14, 2016

Just as rising oil prices finally start to lighten the European Central Bank’s quest for higher inflation, food is back as the dead-weight in the price basket.

As of October, food is again placing the same drag on headline inflation as energy, according to a note published by Societe Generale economists Michel Martinez, Brian Hilliard and Vaibhav Tandon. The difference is that oil prices are on a gradual upward trend, while food price gains have slowed this year.

The slowdown in prices for food in itself is not totally new: for much of 2014, they were a bigger drag than energy. But now, as oil looks set to rise further after the world's largest producers committed to tightening supply, this part of consumers' everyday outgoings may get greater attention.

The ECB expects headline inflation to “increase significantly” in 2017 and sees energy prices accounting for “about four-fifths of the pick-up”, according to staff forecasts released last Thursday. Meanwhile, the outlook for edibles sees a slight rise at best, while downside risks remain, according to the SocGen economists.

“Apart from weather and weaker global commodity prices, Russia’s ban on EU imports has also been a key factor, triggering an excess of food supply in the euro area,” they wrote. “Looking ahead, we expect only a gradual pick-up in food inflation” while “overall, the risks remain tilted to the downside.”

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