The decade before the pandemic was marked by low inflation, low interest rates, and weak wage growth. Following the Great Recession, advanced economies experienced a period of prolonged economic stagnation together with weak labor markets. And some economists, including yours truly, thought it would last much longer.
A pandemic and half a dozen global shocks later, I can say with confidence that era is over. We now face structurally higher inflation and interest rates. Some of this is clearly policy driven — like Trump’s trade war and migration policies. In Europe, some governments have been pushing for overly aggressive minimum wage hikes that ripple through the pay scale.
However, external shocks are also playing a significant role in driving up inflationary pressures. Climate change is no longer a distant threat as the economic cost from natural disasters has surged. Droughts, floods, and heatwaves are hammering agricultural production, from crops to livestock. All of this is now showing up in everyday prices at your local supermarket.
In this piece, we analyze the interplay between surging food prices and inflated salary expectations, both of which are a threat for central bankers who are facing the onerous task of bringing inflation down amidst sluggish economic growth.
Why are food prices so important?
Unlike economists, most people typically don’t track various inflation rate measures each month. Very few of us closely monitor the price of motor vehicles, furniture, insurance, transportation, or cell phone and internet plans, even when many of these items make up a significant share of our annual expenditures.
Rather, households look at the things they purchase regularly like fuel and groceries and infer an inflation rate based on these items. Consumers therefore typically overweight the prices they see each week, and research shows that those matter the most for inflation expectations.
Global food prices have surged
Global food prices are relatively volatile because they depend on factors like weather conditions, energy prices, and trade costs. What stands out, though, is the long stretch of moderate inflation between 2010 and 2020, helped by steady productivity gains in agriculture, efficient global supply chains, and relatively mild weather patterns. That calm ended abruptly with the pandemic and a series of global shocks — from extreme weather events like droughts in Europe to the war in Ukraine and global trade disruptions. Consequently, food prices surged to record highs throughout 2022 and have remained elevated ever since.
While some of the dramatic surge was reversed, the Global Food Price Index has steadily increased by more than 10% since early 2024 (and about 30% since 2020).
Food price inflation is imported but domestic costs also matter
The surge in global food prices matters because countries typically import a lot of their food. Living on a relatively cold island called England, I can tell you that plenty of what we eat is not produced locally, be that tropical fruits, vegetables, rice, Pacific tuna, French butter, Argentinian steak — you get the picture. The U.K. relies on imports for roughly 40% of its food, putting it on the higher end of the spectrum in terms of food dependency.
Furthermore, food prices are set in international markets. Local producers can sell to customers abroad. What that means is that national food prices have surged in tandem with global prices. In Germany, for instance, the Consumer Price Index (CPI) is up 22% since 2020, while inflation for food and non-alcoholic beverages has surged by 37%. The pattern is similar elsewhere: across a group of OECD countries, food prices have risen roughly 10 percentage points more than inflation.
Beyond global forces, local factors have also contributed to the surge. Groceries must be transported from ports to warehouses and then to stores or restaurants. Every step in that chain depends on domestic energy and labor costs. Since the pandemic, blue-collar wages have risen sharply. In the U.K., this reflects both the aggressive minimum wage hikes and a shortage of skilled manual workers. Higher pay for truck drivers, supermarket staff, chefs, and waiters has translated to higher food prices.
Workers are asking for more pay due to inflated grocery prices
The chart below shows how nominal wage growth across advanced economies has markedly shifted up since 2020. Several macroeconomic factors have contributed, including substantial monetary and fiscal easing during the pandemic. What stands out, though, is that nominal wage pressures remain elevated even as global labor markets have shifted from hot to cold!
When inflation topped 10% during the pandemic, wages lagged and living standards fell sharply. That situation recently reversed; in the U.K., pay growth above 5% and inflation below 4% mean workers are finally regaining some lost purchasing power.
However, official inflation captures the price of the typical consumer basket. But very few of us are truly spending money like the average shopper. Renters in London, families with children, or lower-income households spending proportionally more on food all face higher personal inflation rates. What ultimately matters for workers is how their pay compares to the prices they actually face: Grocery bills!
In the U.K., median wages are up by about 39% since 2020 while inflation is up by 29%. But food prices have increased by 36% — almost as much as wages!
The situation is even more dire in the Eurozone. Inflation has increased by about 24% and food prices by 33%. The labor cost index, a reasonable proxy for salaries, suggests that workers’ pay has barely kept up with inflation, never mind food prices!
The Eurozone is obviously a massive economic geography with 20 different national labor markets. Economic and labor market performance have varied substantially across countries since 2020, making the European Central Bank’s job even harder.
The Eurozone’s largest economy has not rewarded workers very well in recent years. Due to sluggish growth, salaries in Germany have barely kept up with overall inflation. German workers are not better off than they were five years ago, on average. And in terms of groceries, they can afford less!
In the U.S., average hourly earnings have marginally outperformed overall inflation since 2020 — but not food prices.
What does that mean for recruiters?
The post-COVID surge in food prices across advanced economies has left many households feeling worse off, even as overall inflation has eased. Persistent increases in the cost of essentials like groceries continue to shape wage expectations, which should worry recruiters. The era of stable inflation and low wage growth ended in 2020 and is not coming back any time soon.
Recruiters will face ongoing pressure to meet higher pay demands as workers try to restore their purchasing power. We expect elevated wage growth and inflated salary expectations to persist, driven not just by inflation psychology due to higher grocery bills but also structural forces, including ambitious minimum wage policies and a growing shortage of skilled blue-collar workers.
