Latest / The European Economy Podcast with Fexingo: ECB, Eurozone, and Continental Markets / Why Eurozone Food Inflation Is Hitting Fresh Produce Hardest
Transcript
- Lucas: You go to the supermarket in Berlin or Madrid or Milan, and the headline is that food inflation is finally cooling. Eurostat had overall food inflation down to about 2.8 percent year-over-year in May. But if you actually look at what people are putting in their carts, there is a real split happening. Luna: The divide between fresh and packaged? Lucas: Exactly. The ECB’s own tracker shows fresh fruit and vegetable prices still running around 5 percent year-over-year. Meanwhile, packaged goods like pasta, canned tomatoes, frozen fish — those are actually flirting with zero inflation or even deflation in some categories. So the headline number is misleading. Luna: And it's not just a blip. This has been going on for about a year now. What's driving it? Lucas: A few structural things, and they're actually pretty hard to fix. First, energy costs. Fresh produce in Europe is heavily grown in greenhouses — think the Netherlands, which is the world's second-largest agricultural exporter by value. Those greenhouses run on natural gas. Gas prices have come down from the 2022 peak, but they are still about double pre-war levels. And for a tomato grower, energy is maybe 30 percent of operating cost. Luna: So the energy premium is baked into the price of fresh, but for a can of beans, the energy cost is a much smaller share of the final shelf price. Lucas: Right. Processing and packaging actually insulate the product from energy volatility. The other big factor is water. Southern Europe — Spain, Italy, parts of Greece — they've had three consecutive years of below-average rainfall. Spain's reservoirs are at about 40 percent capacity. That directly hits yields for things like oranges, lemons, peppers, lettuce. Luna: And you can't just import your way out of it because other Mediterranean producers are in the same boat. Morocco has its own drought problems. Lucas: Exactly. And the euro has been basically flat against the dollar — we are at about one point one four dollars per euro right now. So there's no currency buffer to make non eu imports cheaper. If you bring in avocados from Peru or berries from Chile, the exchange rate isn't helping. Luna: It's interesting because this is the kind of inflation that really hits lower-income households harder. Fresh produce is already more expensive than processed food per calorie. And when the price gap widens, people trade down to cheaper, less healthy options. Lucas: I saw some data from Kantar showing that private-label penetration in packaged groceries across the Eurozone is now at an all-time high — over 35 percent in Germany. But private label barely exists in fresh produce. How do you create a store-brand tomato? It's the same commodity. So the structural pricing power stays with the growers and the wholesalers. Luna: And that brings us back to the ECB. They keep saying food inflation is transitory or that it will fade as energy costs normalize. But this fresh-produce stickiness feels less about energy and more about climate and supply-chain fragmentation. Lucas: That's the part that worries me. The ECB's own wholesale price data just came out — June wholesale prices declined point three percent month-over-month, driven by a big drop in gasoline. That's good for the headline. But wholesale food prices actually rose point two percent. So the pipeline isn't clearing for fresh produce the way it is for fuel. Luna: If you're the ECB, do you even have a tool for this? You can raise rates to cool demand for cars and housing, but you can't make it rain in Almeria. Lucas: Right, monetary policy is a blunt instrument here. What you really need is investment in water infrastructure, more efficient irrigation, maybe desalination plants. But those are multi-year projects. In the short term, the pressure on fresh produce prices is not going away. The structural issues are real. Luna: And this is exactly the kind of detail that gets lost when people just look at the headline CPI number and say 'inflation is solved.' Lucas: That's actually why we do this show — to dig into the numbers that actually affect how people live. And it's also why we keep the show free of ads and sponsors. We don't want someone selling you a financial product while we're explaining why your grocery bill is still high. Luna: Yeah, that independence matters. If you find this kind of analysis useful and want to support it, the link is buy me a coffee dot com slash fexingo. No pressure, just a way to keep this going. Lucas: So where does that leave us? Let's talk about what consumers are actually doing. There's some fascinating behavior change happening. Luna: I've seen people switching to frozen vegetables as a substitute for fresh. Frozen broccoli is cheaper, and the nutritional difference is minimal. Lucas: That's a big trend. Frozen fruit and vegetable sales in the Eurozone were up about 6 percent year-over-year in the second quarter. And it makes sense — frozen has a much longer shelf life, less waste, and the processing cost is lower per unit. But it also means the fresh supply chain is losing volume, which could push fresh prices even higher as fixed costs get spread over fewer units. Luna: That's a vicious cycle. And it's regional too. In Southern Europe, where fresh produce is more central to the diet, people are more reluctant to switch. So you get higher inflation in Italy and Spain for fresh items than in Germany. Lucas: Right. Italian fresh fruit inflation was running at 6.2 percent in May versus 3.8 percent in Germany. That's a meaningful gap within the same currency zone. It creates real divergence in cost of living. Luna: Which then feeds into wage demands. If your grocery bill in Rome is going up faster than in Berlin, you're going to ask for higher raises. Lucas: And that is exactly how sticky services inflation persists. The ECB is watching unit labor costs like a hawk. If food inflation keeps pushing up wage demands in the south, it makes the inflation problem broader than just tomatoes and lettuce. Luna: So the fresh produce story is really a microcosm of the Eurozone's deeper challenge: you have structural supply shocks colliding with a one-size-fits-all monetary policy. Lucas: Exactly. And there's no quick fix. The greenhouses in the Netherlands won't get cheaper gas overnight. The aquifers in Spain won't refill in a season. So for the next year at least, expect the fresh produce aisle to remain a point of friction in the inflation data. Luna: And maybe a reminder that headline numbers never tell the whole story. Lucas: They really don't. That's what we're here for.