Supermarket Prices Brace for Impact: How the Iran Conflict Could Drive Up Your Grocery Bill

Supermarket prices have seen a massive surge since 2022. Now, the geopolitical tensions surrounding the Iran conflict threaten to trigger another significant price shock. The crucial question is, how severe will this impact be for consumers?

With no immediate resolution to the Iran conflict in sight, experts warn that an energy price shock could lead to an explosion in food prices, potentially mirroring the rapid increase observed after Russia's invasion of Ukraine. Food retail expert Stephan Rüschen suggests that while the initial increase might be less severe than four years ago, an escalating situation could drive energy prices higher, resulting in food price inflation comparable to that of 2022.

In 2022, food prices peaked with an increase of one-fifth compared to the previous year. From April 2022, shortly after the outbreak of the war in Ukraine, they sharply decoupled from general inflation. The annual food inflation for that year reached 13.4 percent. By the end of last year, food items were 37 percent more expensive than at the end of 2019, while overall prices during the same period rose by approximately one-fifth.

Rüschen specifies that new price increases would particularly affect products that are energy-intensive in their production or processing, as well as goods requiring long transport distances. This includes staples like grains, corn, soy, and rice, partly due to rising costs for fertilizers – which in turn impacts meat prices as these are crucial for animal feed. Energy-intensive products also encompass baked goods, dairy products, and frozen foods. Items like fruits, vegetables, and fish are vulnerable due to their extensive supply chains.

More Customers Opt for Discounters

Data from the market research firm Accurat indicates a noticeable shift in consumer behavior, with an increasing number of shoppers choosing discounters over traditional supermarkets. For instance, Aldi Nord and Süd collectively increased their share of store visitors by 1.7 percentage points to 17.7 percent in the week starting March 16. Netto and Penny also benefited, while Rewe, Edeka, and Kaufland collectively lost 1.8 percentage points. Interestingly, Lidl also experienced a slight dip of 0.3 percentage points. According to the report, a one-percentage-point increase in market share translates to two billion euros in additional revenue.

Maarten Vander Beken from Accurat described this significant fluctuation as "unusual" and unprecedented. Handelsexperte Boris Planer attributes this trend directly to the Iran conflict. Consumers, he explains, have less disposable income due to increased fuel prices and are also concerned about potential imminent price hikes for everyday goods. This apprehension drives them to be more budget-conscious when shopping, Planer told "Handelsblatt".

The German Food Industry Association warned of a "looming cost tsunami for the food sector" as early as March. Just days later, farmers announced they would have to raise prices for their produce due to escalating costs for diesel and fertilizer, noting that up to a third of their annual diesel consumption occurs between March and June.

Will VAT on Supermarket Items Be Reduced?

Following fuel prices, the federal government's task force is now also scrutinizing food costs. While food prices may not rise as quickly, inflation-dampening measures are already under discussion, such as a reduction in VAT on food. Currently, most goods are subject to a 19 percent VAT rate, with a reduced 7 percent rate for selected food items.

Food retail expert Rüschen views a further reduction to zero percent VAT critically. He argues it would be a "watering can" approach, benefiting all consumers rather than specifically targeting low-income households. Furthermore, the professor for food retail at the Duale Hochschule Baden-Württemberg Heilbronn questions whether the abolition of VAT would genuinely be passed on to consumers.

Chancellor Friedrich Merz did not rule out a significant reduction in the VAT rate for food, particularly to alleviate the burden on very low-income households. These households spend a larger proportion of their disposable income on food, making them disproportionately affected by price increases.

The general inflation rate in March already rose significantly to 2.7 percent due to the oil price shock, marking the highest level in over two years, up from 1.9 percent in February. Food items were 0.9 percent more expensive in March compared to the same month last year.

Economists forecast an inflation rate of around three percent for the coming months. In light of rising energy costs, significantly more German companies plan price increases than before the Iran conflict. The corresponding Ifo Institute indicator climbed by a quarter in March compared to the previous month, reaching its highest level in three years.