Macro Moments Weekly: Inflated fears?

Key takeaways:

1. Food prices are the real inflation risk, not energy. While oil prices are up over 60% YTD, agricultural prices have remained relatively subdued — but rising fertiliser and energy costs are likely to suppress future production, setting the stage for meaningful food price increases in 2027.
2. Inflation may surprise everyone to the downside in late 2026. Moderate food prices in H2 2026, combined with favorable base effects from last year's tariff-driven price increases in the US, could push inflation lower than expected — potentially reviving the rate cut conversation.
3. Europe faces a more acute risk than the US. The Strait of Hormuz disruption has driven European LNG prices up 72% YTD versus a 10% decline in the US, and Europe's ability to restock before winter remains uncertain — making European inflation far more vulnerable to the ongoing conflict than American inflation.

When the US-Iran war started, we highlighted that second-round effects would include rising energy prices, but that the most important thing for the consumer would be food prices. Energy is part of the cost of every step of producing, harvesting, storing, distributing and selling food. While we feel some impact in the immediate season, we will also see impact in the following season because of the rise in fertiliser and feed prices, which may cause significant future production declines and price increases.

But are these concerns exaggerated? After all, while oil prices are up over 60% year-to-date (YTD), agricultural prices have been much more subdued. Wheat prices have risen while cattle prices are at best flat in the United States.¹ In Europe, beef prices have fallen back to 2025 levels, while wheat prices are virtually unchanged.² 

Looking out to 2027, forecasts suggest food production may fall, and perhaps significantly in some areas, such as beef and wheat, as markets correct for an oversupply from 2026.³ Although price shocks for fertiliser and broader energy supplies are likely to continue, the fact that current crop prices are flat (giving no incentive for higher production) means that supply may fall further.

Still, it appears that consumer prices in the second half of 2026 are unlikely to rise as much as they did in the first half (or in the memorable price surge of 2022), partially because there was already a consumer-price squeeze last year.

As food is the critical component of secondary price effects, that suggests that we might find ourselves with lower-than-expected inflation this coming September and October. In the United States, where there will also be some positive base effect in inflation data caused by comparisons to the price increases that accompanied last year’s tariffs, the impact on price readings might be greater than we think and could even re-start the rate cut conversation.

If we get to that point, it may give more attention to a question that is currently under debate: How much does the Strait of Hormuz matter? Can we survive without so much commercial traffic through the channel? Sure, prices have risen a bit, but life seems to go on, in particular with the artificial intelligence (AI)-driven, ‘K-shaped’ economy.

Can we actually ignore the Persian Gulf shipping crisis? Leaving aside any geopolitical implications it could have, we need to consider two factors. The first is the liquefied natural gas (LNG) supply for Europe. There is plenty of LNG in the United States, but getting it to Europe is not possible, as the export infrastructure does not exist. Hence, the price of LNG YTD is down 10% in the United States and up 72% in Europe.

Can Europe find enough LNG to offset the losses from Qatar? The purpose is to restock for a winter where all weather bets are off because of the return of an El Niño seasonal pattern. (The science is not clear in predicting whether the effect on Europe will be warmer and drier or cooler and wetter weather.) The expectation is that Europe will not be able to restock LNG, but we will not know until September, so there is still just enough time for a resolution the conflict to enable restocking. This uncertainty has a significant impact on inflation for Europe, but not for the United States.

Looking to next year, expectations are already appearing for lower agricultural planting rates in 2027 due to current low farm profitability. That would raise the prospect of higher food price inflation in 2027, which would likely be universal.

Is what we are looking at a delayed reaction to the impact of the current US-Iran war? For now, the impact seems to be delayed by moderate food prices; could alternative supplies of oil and even LNG delay the effects even further? But then, would the impact catch up with us all in 2027?

Parting shot

Faced with the prospect of food price inflation costing them votes at the ballot box, European governments have acted in a variety of ways. France is taking measures such as allowing farmers to defer making contributions to the social security system and other tax breaks, as well as making loans for fuel.⁴ In Italy, the government is trying to use the value-add tax (VAT) windfall on petrol to subsidise farmers' fuel, as well as a tax offset for the fuel farmers use.⁵ In the United Kingdom, the government called up the supermarkets and asked them (warned them?) to cap prices.⁶ The supermarkets swiftly rebuffed it.