Don't swallow the hype surrounding food inflation

COMMENT: Official inflation figures undermine recent scares that post the euro, food prices in Ireland are out of line with our EU neighbours, writes Ciaran Fitzgerald

Despite the very low levels of food inflation in Ireland, there is an extraordinary level of hype suggesting otherwise.

Price increases as measured by official inflation figures in Irish food and grocery products is running at 2.8 per cent in the year to July 2002. This compares very favourably to an overall inflation figure of 4.2 per cent and is also at the lower end of the EU range. These figures undermine the much-hyped view that post the euro, food inflation in Ireland is out of line.

The introduction of the euro has facilitated a much simpler comparison of costs and prices across the EU. Other than the Forfás Eurosurvey report, the depth of a lot of the commentary in Ireland on "euro pricing" has been quite thin. Most of the commentary has been based on flimsy sampling methodology that ignores the fundamental rules of price comparisons.

For price surveys to be accurate the following rules must be adhered to: ensuring that packaging sizes are exactly the same; that the goods being compared are not on sale or promotion; and that government taxes are a huge factor in price comparisons. In comparing the price of drink between Ireland and France, the Irish Government tax-take on a pint of beer is almost one euro, against 13 cents in France. Taxes on wine are nine times higher and on spirits two-and-a-half times higher in Ireland than in France.

Furthermore, recent euro price surveys have blatantly ignored the connection between the dramatic rise in pay and other business costs in Ireland in recent years and the level of Irish prices.

Average wage costs in Ireland have increased by 25 per cent in recent years compared to 7.5 per cent in the euro zone; energy and insurance costs have also increased dramatically. We cannot take advantage of the economies of scale that considerably larger markets can enjoy and, of course, our geographic position makes us particularly sensitive to transport and distribution costs.

In contrast to the "rent-a-survey" approach, the Central Statistics Office publishes a monthly analysis of price changes in Ireland and across the EU. This successfully measures the changes in prices of a representative basket of over 1,000 products based on detailed analysis of household spending patterns across all regions and all consumer categories.

In the context of Ireland's euro changeover experience and our current inflation position, the CSO figures are quite illuminating. The three-month figures to February 2002, which cover the majority of the euro changeover period, show that inflation in food and grocery products was running at 0.7 per cent, i.e. virtually unchanged from November 2001. This confirms the experience of food manufacturers that while there were major cost increases to industry, there was a virtual price freeze in the sector throughout the changeover period.

Indeed the low level of price changes recorded since the introduction of the euro, at 2 per cent from January to July across all food categories - reinforces again the point made in the Forfás report, that the food and grocery sector in Ireland managed the changeover fairly and properly.

The most recent inflation figures for July highlight a number of important trends.

Overall inflation declined for the fourth straight month down from 4.4 per cent in June to 4.2 per cent in July.

Food and grocery inflation is running at 2.8 per cent well below the general inflation rate of 4.2 per cent.

Food inflation in Ireland is at the lower end of the range in the euro zone.

Inflation in the "non-traded service" sector is ranging between 7 and 10 per cent.

Among the categories of food products showing the highest price rises since January are vegetables at 4.5 per cent (potatoes alone 11 per cent) and fresh fish at 5 per cent.

The sterling-euro exchange rate has a major impact on the cost of grocery products in Ireland. The UK is the source of 80 per cent of Irish grocery imports. In contrast, exports of grocery products from the UK to other euro-zone countries is minimal.

Thus the increase in value of sterling against the euro over the last three years has inflated retail prices in Ireland. Therefore, when comparing Irish prices with the rest of the euro zone one must take into account the inflationary impact of the rise in the value of sterling.

The cost of doing business in the Irish grocery sector has increased dramatically in recent years. However, manufacturers and retailers have not passed these costs on to the consumer.

Frantic headlines have grabbed our attention in recent months more than solidly based research. Nothing is to be gained by hyping up scares about food inflation. This can only contribute to a dangerous wage-price spiral in an economy already facing slowdown.

Ciaran Fitzgerald is Director of IBEC's Food and Drink Federation