Tracking Lebanon’s price relief

After months of rising prices driven by war-related disruptions, signs of relief are beginning to emerge for consumers in Lebanon. Immediately following the announcement of a peace agreement between the United States and Iran, oil prices dropped to around $80 per barrel after spending much of the previous three months above $100. The decline raised hopes that lower fuel, shipping and transportation costs could eventually translate into cheaper food and consumer goods.

With the outbreak of the U.S.-Israeli war against Iran and the closure of the Strait of Hormuz, Lebanon's Consumer Price Index rose by 4.9 percent in March compared with February, coinciding with a surge in oil prices from $72 to more than $100 per barrel. Inflation continued to climb in April, albeit at a slower pace, increasing by 3.04 percent, according to figures published by Lebanon's Central Administration of Statistics. As oil prices retreat and supply chains begin to stabilize, attention is now shifting from why prices rose to how quickly they might come back down.

Drivers of rising prices

Several forces drove the increase in food prices, reflecting both global pressures and domestic cost burdens.

Dr. Nabil Fahd, Vice President of the Beirut and Mount Lebanon Chamber of Commerce, Industry and Agriculture and President of Lebanon’s Supermarket Owners Syndicate, said the inflation recorded during the previous three months of conflict stemmed from four main factors: higher prices for goods at the point of production, increased shipping and insurance costs linked to rising oil prices, higher transportation costs within Lebanon (from the port to importers, warehouses, retail stores and supermarkets), and rising operating expenses for supermarkets themselves.

Shipping and operating costs

Shipping costs to Lebanon rose in tandem with oil prices, increasing by between 10 and 30 percent depending on the country of origin. The extent to which those higher costs translated into retail prices varied according to the nature and value of the goods being imported.

For example, an additional $3,000 in shipping expenses on a container of rice worth $20,000 imported from Thailand or Vietnam would raise its final cost by roughly 10 percent. The same increase applied to a container of canned tuna valued at $100,000, however, would amount to only about 3 percent of its value.

The impact was particularly pronounced for imports from East Asia. While shipping costs from Europe and the United States increased only marginally, many vessels carrying goods from Asia were forced to divert around the Cape of Good Hope, lengthening transit times and adding significantly to transportation expenses.

According to Fahd, supermarkets also faced mounting operating costs during the crisis as higher fuel prices drove up transportation expenses and increased electricity costs strained day-to-day operations. As these pressures rippled through the supply chain, they ultimately found their way onto store shelves in the form of higher consumer prices.

When will prices decline?

For imported goods, any easing in costs is expected to be reflected relatively quickly, assuming oil prices and shipping rates remain at current levels. Consumers are unlikely to see immediate reductions, Fahd noted however, as many importers and retailers are still selling inventory acquired when transportation, insurance and operating expenses were significantly higher.

The adjustment is expected to take longer for locally manufactured products. Lebanese producers depend heavily on imported raw materials, much of which was purchased during the period of elevated costs. As a result, manufacturers will continue pricing their products based on existing inventories until those stocks are exhausted. Only then are lower raw material and transportation costs likely to filter through to consumers, a process that Fahd estimated could take around one month.

Yet lower costs do not automatically translate into lower prices. Fahd argued that the extent to which consumers ultimately benefit will depend largely on the level of competition within each market. In highly competitive sectors, businesses are more likely to pass savings on to customers in order to protect market share. Where competition is weaker, however, price reductions may be slower to materialize or more limited in scope.

Fuel costs offer an early indicator

The broader trend is already visible in the energy sector. Following the ceasefire and the easing of regional tensions, diesel and gasoline prices in Lebanon began to decline, with industry representatives anticipating further reductions if global oil prices continue to retreat. Lower fuel costs, in turn, could help ease transportation and operating expenses across the broader economy.

For Lebanese consumers, however, the more pressing question is when those savings will begin to appear on supermarket shelves. While some goods may become cheaper in the coming weeks, a broader decline in prices is likely to unfold more gradually as businesses work through inventories acquired during the period of elevated shipping, fuel and operating costs. Until those stocks are depleted, the effects of lower global prices will remain only partially visible in the cost of everyday necessities.