UBS warns food price risks could push bond yields higher

Investing.com -- UBS economists said food price uncertainty has become a recurring concern among clients, with potential implications for euro area inflation and bond yields.

Food-related items make up a large portion of the euro area HICP basket, with processed food accounting for 14% and unprocessed food representing 5%. European Central Bank President Christine Lagarde said at the September press conference that Governing Council members were questioning the evolution of food prices following what UBS called a surprising summer slowdown.

In September projections, ECB staff reduced food inflation forecasts by 0.7 percentage points to 1.9% in 2026 and by another 0.7 percentage points to 2.8% in 2027. The staff acknowledged risks of higher food prices due to summer heatwaves and the ongoing El Niño weather pattern.

The FAO Food Price Index increased 2.5% year-over-year in August. UBS noted that previous growth spikes in the FAO series have not always been closely linked to El Niño episodes.

UBS said a renewed food price shock would create upside risks to euro area inflation and yields. The bank cited research by Peersman from 2018 estimating that euro area inflation would have been 0.2 to 0.8 percentage points lower in 2009-12, and 0.5 to 1 percentage point higher in 2014-15 with disruptions in global food markets.

The Bundesbank warned that planned health and pharmacy reforms should temporarily increase the German inflation rate by just under 0.5 percentage points in the first half of 2027.

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