A recipe for inflation

In Pakistan, the prohibitive price of tea became an election issue; the Chinese Communist Party’s politburo frets about how long it may be before its poor can afford to eat pork again; Mexican housewives have rioted to protest the shortage of affordable tortilla; Swaziland is facing famine, even as it exports cassava to feed the rich world’s hunger for biofuel.

Rising agricultural inflation, or “agflation”, is a global phenomenon that touches everyone, and almost every day it seems to intensify. This week, the price of prime spring wheat rose by 25 per cent on the American exchanges, while Russia and Kazakhstan announced fresh curbs on exports to protect domestic supplies. On the Chicago Board of Trade, the price of wheat has hit record highs of more than $12 a bushel. Since 2004 world food prices have doubled, and over the past year alone agricultural prices are up by about 50 per cent.
For those in the developing world who spend their money on food and little else, this is a matter of life and death. The United Nations’ Food and Agriculture Organisation says the rising price of cereals such as wheat and maize are a “major global concern”.

In the West, the damage caused by increases in the price of food is damped by the costs of transporting and refining it into finished products, and by the general prosperity of consumers. Hard-pressed British farmers even regard current trends as a bonus. The large supermarket chains and food processors are also doing their best to resist the great food inflation. But agflation is making the lives of policy makers more difficult and is hitting household budgets.

Yesterday’s “producer price” figures in the United States confirmed the clear inflationary problem faced in factories and food processing plants – a leading indicator of what will soon be seen in the shops. Over the past 12 months, producer prices rose 7.4 percent, the fastest pace since October 1981. Food prices climbed 1.7 per cent, the most since October 2004. Crude food prices – that is, the input costs faced by US suppliers – increased 2.7 per cent. The equivalent figures in the UK reported recently were even more alarming: food prices up 8.5 per cent and input food costs up by between 14.9 per cent (imports) and 36 per cent (home grown) on the year.

Commodity price increases tend to feed on themselves, if that’s an appropriate expression. Oil-price hikes raise the cost of hauling crops from continent to continent, especially some of the higher-end “cash crops” the West has developed a taste for; mange-tout flown in from east Africa is bound to become more pricey as the cost of aviation fuel climbs, even if the underlying production conditions don’t change. Higher grain prices tend to push the cost of rearing livestock up. And higher oil prices incentivise farmers to switch to biofuel crops, often at the behest of nervous governments worried about the security of their energy supplies.

Independent