Regular readers would know that we’ve devoted several QBs to discussing inflation. And although it appears to be on the retreat in most general measures, inflation is proving to be sticky in the food sector – indeed, food price inflation has been stubbornly persistent, and falls in commodity and energy costs have not appeared to feed through to grocery baskets.
This matters, particularly for those households which live paycheck to paycheck. Furthermore, there is perhaps no political variable more important than the price of food: I can recall elections in India being determined by the price of onions, and uprisings in Africa occurring because of the price of bread. No government will be seen as legitimate by people who cannot afford to feed their families. So it is bad news that just as the price of energy is coming down from its extreme peaks last year, and households are beginning to feel those costs dissipate somewhat, food price inflation in much of the world remains stubbornly high.
The most recent food inflation is mostly a global story. Food commodity prices soared during Russia’s scale invasion of Ukraine last year, just like energy prices, and in part because of them, but also because of the Russian theft and blockade of Ukrainian food exports. From a European perspective, eurozone food price inflation was 16% year-on-year in April. In the US, less internationally open than Europe’s economies and the world’s most efficient food producer, food price growth jumped last year too but to a lower and earlier peak, and started falling in recent months.
The latest inflation data in Australia show food price inflation at around 8% in the March quarter, down from 9% in the December quarter. But food price inflation hurts emerging markets most, raising the risk of civil unrest with echoes of the Arab spring and putting policy makers in a bind between stepping up with fiscal support to ease the pain on their populations or preserve government finances.
The UN Food and Agriculture Organization’s (FOA) food price index shows that global food commodity prices peaked a year ago and have fallen by around one-fifth since then. So far, this positive development has not fully benefited the most vulnerable consumers. The price increases are particularly painful for less wealthy households because food is an essential part of their budgets. Lower income households tend to be hit harder because they typically spend a greater portion of their incomes on food.
UN FOA World Food Price Index – over Ten Years
Source: Trading Economics
While throughout 2022 and early 2023, global food prices have eased, this hasn’t necessarily reflected in prices at local markets in countries experiencing the most severe food insecurity. Countries that rely on food imports and have low foreign reserves are at greatest risk. Costly agricultural input materials (e.g. fertiliser), labour, and energy also contribute to high food costs.
Not unexpectedly, the food gap between advanced and developing economies is growing. Developed countries tend to have stronger currencies and better access to credit, meaning food supplies and input materials are more affordable and accessible. The most vulnerable countries, however, are often forced to work with institutions like the IMF (and no, that’s NOT Impossible Mission Force, rather, the International Monetary Fund) to secure financing to pay for imports. Different countries have varying degrees of success in these negotiations, but it’s generally a challenging path as meeting IMF requirements is often constrained by political considerations at home.
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