"Agflation" takes root in world prices
LONDON (Reuters) - Food prices, historically as changeable as the weather, are often put to one side when central bankers and economists gauge inflation, but soaring prices for everything from corn to milk are forcing a rethink.
Calculations of 'core' inflation strip out food and energy prices, seen as volatile and therefore liable to skew any snapshot of consumer price levels. But some analysts now argue that a steep climb in the cost of food worldwide in recent months could be permanent, or at least long lasting.
Merrill Lynch has even coined a term to capture the phenomenon of food prices forcing up consumer prices more broadly: "agflation."
Corn prices are at 10-year highs, pushing up the cost of feed for livestock and therefore meat as well. Wheat and dairy prices are also up across the board.
The implication for global growth is potentially serious if the inflationary threat convinces central banks to set interest rates at higher levels than they would otherwise do.
Few countries, developing or developed, seem immune.
In China inflation was 3.0 percent in April, just off a two-year high, driven by food price inflation of 7.1 percent.
U.S. food prices, normally in line with broader price levels, are expected to outpace the general inflation rate by as much as 2 percent for the next two years.
Inflation in Turkey has jumped to 10.7 percent, partly the result of food prices rising four times faster than a year ago.
A leading culprit in Britain's 3.1 percent inflation in March, famously beyond the Bank of England's target zone, was food prices, up nearly twice as much.
VOLATILE OR PERMANENT?
Forecasting the future of food prices is more the realm of the agronomist than the economist. But enough evidence has now accumulated for economists to contemplate 'what-if' scenarios of persistently higher food prices and their impact on inflation.
"The risk is that you call something temporary or volatile, which turns out to be structural," said Lex Hoogduin, chief economist at Robeco in the Netherlands.
Hot, dry weather in many parts of the world augurs poorly for this year's harvest -- that is seasonal volatility.
However, there are also shifting demand and supply patterns, which could amount to structural change. Continued...
