Food inflation: a headache for CEOs and consumers alike

The consumer goods market is facing its fiercest inflationary pressures in a decade. That, said Judith Evans in the FT, was the message last week from Unilever – whose brands range from Hellmann’s mayonnaise to Magnum ice cream to Domestos bleach. Chief executive Alan Jope said “very material cost increases”, for packaging, transport and particularly raw materials, were squeezing its profit margins. The price of palm oil was up 70% from the first half of last year, he said, while soybean oil was up by 80% and crude oil by 60%.

Inflation, it seems, is “becoming as much a headache for CEOs of household staples companies as for shoppers”, said Carol Ryan in The Wall Street Journal. Margins are hurting. Unilever’s shares fell 5% on the announcement because, despite improved sales, “operating margins are expected to be flat in 2021”. Bernstein analysts recently estimated that Unilever and its main European peer Nestlé face roughly 14% increases in bills over the next 12 months. Prices of individual ingredients such as soybean oil are rising even faster. Should the company try and absorb these costs or pass them on? And to whom? It’s an ethically fraught question. Consumers in emerging markets have less disposable income on average than those in mature economies, but it’s easier to hike prices there since supermarkets in developing countries have “less bargaining power than in Europe and the US”. Consumer bosses thus “face a delicate balancing act” to get through this year with their margins, market share and reputations intact.

“Anxiety that inflation is about to gut the economy” is all around, said Bloomberg. “At the White House. In consumer data. On earnings calls.” Roughly 87% of S&P 500 companies that released earnings in July mentioned inflation. The only places apparently immune to the angst are the stock and bond markets, where investors have taken Fed chairman Jerome Powell’s mantra that the current level of inflation is “transitory” to heart.

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If the rising price of coffee – hit by a shortage of containers – is anything to go by, “trouble is brewing in America”, said The Economist. Yet “transport logjams and paltry harvests in producing regions” have “conspired with surging demand to stoke food inflation across the smorgasbord”. The UN Food and Agriculture Organisation expects the value of global food imports to reach nearly $1.9trn this year – up from $1.6trn in 2019. “In May, its index of main soft commodities hit its highest value since 2011.” Price spikes could feed broader inflation – already rising in many countries – which would be bad for consumers. But their loss is a gain for “big agriculture” and the giant companies that source and ship foodstuffs. There’s always a winner somewhere.