FAQ on Global Food Inflation
G lobal food prices have surged in the past two years as pent-up demand coupled with supply disruptions push up prices of essential goods such as wheat, corn, edible oil, sugar, etc.
What are the implications of elevated food inflation for economies and the financial markets?
As consumers, we keenly feel the impact of rising food inflation as our food expenditures increase over time. In Malaysia, for example, chicken prices have risen by 17% year-on-year to RM10 per kg in June 2022 due to rising costs for chicken feed amid the Russia-Ukraine conflict. In fact, over the last 20 years from 2000 to 2019, global food inflation has registered an average annual rate of around 2.8% in tandem with global economic growth.
Global food inflation matters to consumers as it impacts their cost of living. For many consumers, the price and availability of food is essential to their economic well-being. For investors, an environment of rising inflation is particularly worrisome as the tighter monetary policies adopted by major central banks to address inflationary pressures have placed downward pressure on the global and regional equity markets.
In this article, we outline four Frequently Asked Questions regarding the current global food inflation issue.
1. What is causing the current global food inflation trend?
Over the last two years up to June 2022, global food prices have risen by 53%1, which translates to an annualised growth rate of 22%. This has consequently raised the cost of living for consumers.
The increase in global food prices has been driven by the following key factors:
(a)Supply chain disruptions
The closure of production lines amid pandemic-related lockdowns in 2020 and the subsequent re-opening of economies in 2021 have caused port congestion and supply chain disruptions across the world. For example, shipping delays at ports in China and the United State (U.S.) due to Covid-19 lockdowns have impacted the delivery of agriculture exports such as fruits, vegetables, and grains.
(b)Rising agriculture prices
Furthermore, the Russia-Ukraine conflict in early 2022 led to shortages for wheat, barley and fertilisers (essential for crop cultivation); thereby contributing to higher food prices globally. Russia and Ukraine accounted for about a quarter of global wheat and barley exports in 2021 on a combined basis. The two countries also accounted for 28% of the world’s fertiliser (made from nitrogen, phosphorous and potassium) exports in 2021. Thus, a prolonged conflict can worsen existing supply shortages in the agriculture market.
(c)High energy prices
Historically, food prices have been impacted by energy prices as food supplies have to be transported for processing before being sold at their final consumer markets. The recent spike in oil prices above US$100/barrel has raised the cost of transporting agricultural produce from one country to another, pushing up input costs. In China, for example, food inflation rose to a 20-month high of 2.9% in June 2022 due to higher vegetable prices amid elevated crude oil prices and the Covid-19 lockdowns in several major cities.
(d)Adverse weather conditions
Changing climate and weather conditions such as an unexpected drought or prolonged rainfall can affect agricultural production. For example, in the U.S. this year, excessively cool and wet weather has slowed the crop-planting progress for corn, soybean and spring wheat; thereby hampering their supply.
(e)Weakening of local currencies against the U.S. dollar
Since food imports are mainly paid for in U.S. dollars (USD), the depreciation of local currencies against the USD has caused importers to pass on the higher costs to domestic consumers. Based on the U.S. Dollar Index, the USD has appreciated by an average of 6.4% for 2021 and 9.4% for the year-to-date period up to 30 June 2022 against a basket of major currencies following expectations for higher U.S. interest rates.
2. What is the impact of rising food inflation on different economies?
Food inflation will have a more significant impact on developing countries as compared to developed countries due to the former’s relatively lower levels of income and higher share of household spending on food. For example, in emerging Asia, food accounted for 25% of consumer spending in 2021 compared to around 17% of consumer spending for advanced economies2 . Although households in the advanced economies are also impacted by rising food prices, their higher income levels enable them to better withstand the effects of food inflation.
In addition, countries that import their daily food necessities from other nations are more vulnerable to food inflation. For example, the Philippines, a net importer of food with a population of 110 million in 2021, has faced food shortages in the past due to severe weather conditions. As shown in Table 1, the inflation rates of most countries are forecast to surge in 2022 on the back of higher food and energy prices. Going forward, while most economists project global inflationary pressures to abate in 2023, the pace of inflation will depend on the extent to which commodity prices stabilise and how quickly supply chain disruptions are resolved.
Table 1: Inflation Rates of Selected Economies (2021-2023F)
||Food Weight in CPI
||The weight of food in the Consumer Price Index (CPI) for selected economies ranges from around 9% to 36%.
*Bloomberg forecast as at 30 June 2022 ^Bank Negara Malaysia's forecast
# Food & beverage
3. What can governments do to contain food inflation?
To tackle inflation, governments can resort to a variety of policy measures:
(a)Raise interest rates to cool demand
Historically, central banks will tighten monetary policies such as raising a country’s benchmark interest rate in order to stem inflation. Higher interest rates tend to dampen overall consumer demand (demand-pull inflation), including demand for discretionary food products and restaurant dine-ins; thus easing inflationary pressures.
However, higher interest rates may have a limited impact on food inflation when it is caused by supply-related or cost-push factors such as production disruptions or higher labour and raw material costs. Furthermore, higher borrowing costs may discourage farmers from making investments in agriculture, leading to lower food production.
(b)Price controls and subsidies
Another measure that governments use is to impose price controls (put a cap on prices) or subsidise essential food items such as wheat, eggs, flour and cooking oil in order to keep prices from rising. Nonetheless, price controls may limit supply when a producer’s business profits are eroded by rising input costs amid the price ceiling.
A shortage of food has led some countries to impose export bans on essential agriculture products to stem rising food inflation. For example, the Malaysian government placed a temporary ban on the export of poultry from June 2022 due to a shortage of supply, which caused chicken prices in the local market to rise. However, should more countries impose such measures in a bid to tame their domestic inflation, this could worsen food shortages for import-reliant countries; thereby worsening global food inflation.
4. How have policies to contain inflation affected financial markets?
Among the policy measures to contain inflation, the monetary policy of raising interest rates has been the main tool utilised by central banks to reduce demand-pull inflation. An increase in interest rates will cool domestic demand, which may cause economic growth to slow.
As a result of concerns over the economic impact of rising interest rates this year, global and regional equity markets have consolidated for the year-to-date period to 30 June 2022, with the S&P Global 1200 Index retracing by 20.3% and the U.S. S&P 500 Index registering a loss of 20.6%. Meanwhile, the 10-year U.S. Treasury (UST) yield surged to a near 11-year high of 3.47% on 14 June 2022 amid rising interest rate expectations before easing to 3.0% currently.
Looking ahead, as the rising interest rate cycle is still in the early phases, it may take time for higher interest rates to effectively curb inflationary pressures. Investors are expected to closely monitor the price of key commodities as well as the global supply chains amid the Russia-Ukraine conflict and the potential re-introduction of lockdown measures to contain the spread of Covid-19. Barring unforeseen circumstances, the recent lifting of lockdown measures in selected cities in China from 1 June 2022 will help to alleviate disruptions to the global supply chains; reducing some of the supply-related inflationary pressures.
In summary, higher inflation, be it driven by food or other commodity prices, can cause markets to be volatile as central banks seek to stabilise consumer prices by raising interest rates. Eventually, market sentiment is expected to improve as the pace of inflation slows.
As local and global equity markets may continue to experience elevated volatility amid the environment of high inflation and rising interest rates, retail investors are well-advised to adopt a long-term view. Investors are also advised to maintain a diversified portfolio comprising equity funds and bond funds in line with their risk profiles.
1 The FAO (Food and Agriculture Organization of the United Nations) Food Price Index tracks the monthly change in international prices of a basket of food commodities such as meat, dairy and vegetable oil
2 International Monetary Fund (IMF)