Rising food prices and inflation

I had posted on the issue of rising food prices earlier as well. That time I had said they might rise now it is actually rising.

IMF’s chief Economist Simon Johnson sums up the entire development in his recent note. To see a snapshot of rising prices across commodities see this.

Why have prices risen?
1. Global growth particularly in emerging markets
2. Supply also rises with a lag
3. Serious droughts in some parts of the world
4. A focus on Bio-fuels means the land which was supposed to for wheat (just an example) is now being used for corn putting further supply pressures.

Impact
1. Developed world – not much as food as a % of consumption is low.
2. Exporters of agricultural products- would gain from rising prices. This includes both emerging and developed countries.
3. Emerging and poor countries- would impact as food as a % of total consumption is still quite high. This would lead to higher inflation.  

Rising inflation would lead to tighter monetary policy (higher interest rates) in emerging markets. This would lead to widening interest rate differential and higher capital flows. So, problems of higher capital flows would continue. To this Johnson adds:

There’s nothing wrong with capital flowing from rich to poor countries—in fact, if it happens in the right form and with deliberate speed, it can definitely help development. But the IMF’s work on financial globalization emphasizes a very important health warning: if you get too much capital, too fast, and in too footloose a fashion, there can be serious consequences for your economic stability and growth.

Inflation is also going to rise in advanced countries as well. In developed countries, both direct and indirect impact of rising food prices on total inflation is low. (Indirect impact is when food prices effect other things like say wages. So if people start having higher food budget, they would demand higher wages and hence inflation would rise.) So inflationary concerns are low but remain.

Inflation is expected to rise and Central Banks in these countries are cutting rates (Canada and US). Testing times for Central Bankers.

2 Responses to “Rising food prices and inflation”

  1. Bank of England joins the Fed Bandwagon « Mostly Economics Says:

    […] of England joins the Fed Bandwagon As I finished writing this post over inflation concerns, Bank of England cut its benchmark rates by 25 bps. So now we have 3 […]

  2. Inflation is always an Indian phenomenon « Mostly Economics Says:

    […] have always pointedto the rising food prices in the world economy and the possibility of rising inflation in the […]

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