Food prices increase at fastest rate since 1989

Monday, 13 March 2023

Food prices shot up in the year to February.

New Zealand food prices were 12% higher in February than they were a year earlier, Stats NZ says.

It was the biggest annual increase since 1989.

Grocery food was the biggest contributor, up 12%.

“Increasing prices for barn or cage-raised eggs, potato chips, and cheddar cheese were the largest drivers within grocery food,” consumer prices manager James Mitchell said.

The second-largest contributor to the annual movement was fruit and vegetables. The increases were seen in tomatoes, up 117% and potatoes, up 48%. Fruit and vegetable prices as a whole were up 23% year-on-year.

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Rural insurers say there have been reports of stock and crop losses after flooding in rural south Auckland and Waikato farms.

Restaurant meals and ready-to-eat food was up 8.4%, meat, poultry and fish prices up 9.8% and non-alcoholic beverages up 9.1%.

Foodstuffs NZ managing director Chris Quin said the co-operative had hoped to see signs by now that food price inflation was starting too turn a corner but the Auckland floods and Cyclone Gabrielle had put pressure on prices due to their impact on fruit and vegetable crops.

“Getting over the immediate operational and supply chain challenges was the first hurdle, but we’ll be dealing with the long tail of effects for many months to come.

“Key produce that has been affected by the severe weather includes lettuce, kumara and onions, with a significant amount of apple crops in the Hawkes Bay damaged.

“It is clear the road to recovery will be different across the range of produce. If you’re talking about leafy greens, they are cropped approximately every five weeks year-round but with kumara and onions, they’ve got a longer growing time, with one crop per year. There is some kumara stock in store, but we are not expecting it to see us through to the new season in 2024.

“The apple harvest is well under way and until it’s done, we won’t know the true position. What we do know is that the wet weather will impact quality and how long the fruit keeps, so while we’ll have more fruit on the local market as we harvest, the full impact on supply will likely be felt towards the end of this year.”

ANZ economist Finn Robinson said the strong food price increase meant there was a risk that inflation was stronger than expected in the first quarter of this year.

“We were expecting to see food prices accelerate a little further in early 2023 – we had penciled in an increase to 10.9% year-on-year in February, from 10.3% in January, but February’s number was quite a bit stronger than expected,” he said.

“It’s not surprising to see food prices continuing to accelerate, given the numerous weather events that have impacted food producing regions over the first part of 2023, not to mention ongoing cost pressures across the food supply chain, wages still rising rapidly, and other idiosyncrasies like egg shortages. It was just uncertain exactly how high food price inflation would rise in response to these events.”

He said the data highlighted the inflationary impact of Cyclone Gabrielle, which he said was likely to keep the Reserve Bank “on its toes”.

“We’re monitoring a range of risks, the cyclone included, which could see inflation remaining strong for longer than the Reserve Bank – or we – thought. Typically, price spikes like this could be something that the Reserve Bank would ‘look through’ when it comes to setting interest rates. But we are already in a high inflation environment, so there’s always a risk that this sharp increase in food prices, in addition to all the other inflationary shocks we’ve seen in the past few years, bleeds through into inflation expectations rising. This would raise the risk of inflation remaining higher for longer.”

Infometrics chief forecaster Gareth Kiernan said the year-on-year price movement in February had been pushed up by a surge in prices after the Auckland floods and Cyclone Gabrielle.

”However, the weather-related effects shouldn’t distract from the underlying trend in food prices, which is still accelerating. Food prices excluding fresh fruit and vegetables are rising at their fastest on record, at 10.4% per annum. Grocery food prices, which are traditionally fairly stable because they have a greater manufactured component, are rising at a 15-year high of 12.2% per annum.

“The figures reaffirm a mix of short-term weather-related effects that the Reserve Bank will look through, along with the persistence of significant underlying price pressures that relate more to other higher costs such as transportation, energy, and labour. It takes time for some of these costs to flow through into retail prices, but at this stage the Reserve Bank will be uncomfortable with the continued pressures.

“The persistence of inflation reflects that price increases have become more embedded in the system throughout the last two years, as well as ongoing imbalances between demand and supply, which tighter monetary conditions have yet to rectify.”