Food prices set to drive 'inflation psyches' for some time to come
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The significance of food prices around the world — even beyond the costs of petrol, gas, and oil — in driving "inflation psyches" has been singled out in a new analysis by a leading economist.
Neil Shearing, who is group chief economist at Capital Economics, a major economics consultancy, said that energy prices may be grabbing the global headlines as global inflation soars, "but the current inflationary surge is also about what’s happening with global food supplies".
Capital Economics estimates that higher food prices account for a sizeable chunk of inflation in major economies, and "many of the factors that are driving energy prices are also behind the surge in food prices" as the war in Ukraine rages.
"It is for good reason that Russia and Ukraine are known as the breadbasket of the world – together they account for just under a one-third of global wheat exports and one-fifth of global corn exports," Mr Shearing wrote in a new analysis.
The war has led to wheat prices soaring by 50%, corn prices increasing by 30%, and also to substitute products, such as soybean prices, going up by 20% since the February 24 invasion by Russia, according to the analysis.
Moreover, "there are powerful feedback loops within commodity markets. Their intensive use of heavy machinery, fertiliser, and transportation means that energy is a significant input cost to agricultural production", he said.
He wrote:
Mr Shearing said the importance of food prices in measuring inflation is that "in fact, in all countries, food accounts for a much larger share of consumer spending than energy".
"Significant and sustained price increases can start to affect their inflation psyches," he said.
Mr Shearing predicted that global food inflation will be led by changes in global agricultural markets, over which central banks have little conventional power by employing interest rates or other monetary policies.
"Agricultural prices are notoriously difficult to forecast, not least because they are particularly vulnerable to shocks such as war and extreme weather events," Mr Shearing wrote.
"That said, we think that, while prices may moderate a little over the second half of this year, they will remain elevated by the standards of the past few years," he said.