Energy price surge signals further food inflation risk

Potential of 50% increase in food prices from 2021 levels.

The recent rise in global energy prices, driven by the war in Iran and the closure of the Straits of Hormuz, is likely to have more persistent consequences for inflation than headline fuel costs alone suggest. While the immediate impact is being felt in energy markets, historical evidence points to a delayed but significant effect on food prices.

*Data from CSO and Trading Economics

The key transmission mechanism runs from energy to fertiliser and, ultimately, to food. Fertiliser production is highly energy-intensive, particularly for nitrogen-based products, which rely heavily on natural gas inputs. As a result, fertiliser prices tend to move closely with oil and gas markets, often responding within a matter of months and with greater volatility.

The more important dynamic, however, is the lagged relationship between fertiliser and food prices. Unlike energy markets, food prices adjust slowly due to agricultural production cycles, input purchasing decisions and supply chain contracts. Analysis of past trends suggests that increases in fertiliser costs typically feed into food prices within a number of months.

Since the beginning of the war in Iran oil prices have risen significantly, and fertiliser prices are following. After the energy price shock in 2022 fertiliser prices rose rapidly, with food price inflation lagging a number of months. This food price inflation continued even after energy and fertiliser prices reduced, with CSO data showing food prices are now 25% ahead of pre 2022 levels. If similar is to transpire now we may be looking at food prices 50% above pre 2022 levels in the near future.

For Ireland, the implications are particularly relevant. As a small open economy with a globally integrated agri-food sector, Ireland is highly exposed to shifts in input costs. Rising fertiliser prices directly affect farm profitability, particularly in energy-intensive sectors such as dairy and tillage, and these pressures are likely to feed through to consumer prices over time.

From a policy perspective, the lagged nature of this process presents a challenge. Even if energy prices stabilise, food price inflation may continue to rise as earlier cost increases work their way through the system. This raises the risk of more persistent inflation, with implications for both households and policymakers.

The key message is that energy price shocks do not remain confined to fuel costs. They propagate through production systems and emerge later in food prices. With both oil and fertiliser now rising again, the outlook points to renewed upward pressure on food inflation into 2026.

Talk to Karol Kissane

Head of Public Sector Services and Economics1800 334 422 karolkissane@ifac.ie Linkedin