World bank issued a report that food costs are up 23% in the past 18? months.
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An unprecedented surge in global demand is behind the 23 percent rise in food prices that the International Monetary Fund recorded during the last 18 months.
"We haven't seen anything on this scale before," said Martin von Lampe, an agricultural economist in Paris
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Rising food prices present challenge to world's central banks
By Rich Miller and Bob Willis
Bloomberg News
Monday, July 16, 2007
WASHINGTON: Rising prices for food, from yogurt in the United States to steak in South Africa, are causing heartburn at the world's most powerful central banks.
The fastest increase in food commodity prices in at least a decade has already led the monetary authorities in Britain, Mexico, Chile and South Africa to lift borrowing costs. It is also sowing doubts about the U.S. Federal Reserve's focus on core inflation, which excludes food and energy, and about the Chinese government's gradual approach to tightening credit.
As the Federal Reserve chairman, Ben Bernanke, prepares to deliver his semiannual report to Congress this week, central bank officials worldwide are anxious that climbing costs could trigger consumer concerns about faster inflation. To keep them from being self-fulfilling, some of the biggest economies might have to push interest rates higher.
"Central banks are more conscious than they've ever been of the danger of allowing inflation expectations to become unmoored," said Louis Crandall, chief economist at Wrightson ICAP, based in Jersey City, New Jersey, and a unit of ICAP, the world's largest broker for banks and other institutions that trade in financial markets.
An unprecedented surge in global demand is behind the 23 percent rise in food prices that the International Monetary Fund recorded during the last 18 months.
"We haven't seen anything on this scale before," said Martin von Lampe, an agricultural economist in Paris at the Organization for Economic Cooperation and Development.
The demand, triggered in part by the increasing use of agricultural commodities to make ethanol and other substitutes for crude oil, may keep prices high for years. The OECD sees U.S. output of corn-based ethanol and European consumption of oilseeds for biofuels doubling by 2016.
Chinese and Brazilian production of ethanol will expand even faster, the OECD said in a report published this month with the UN Food and Agriculture Organization.
Rising prosperity in China and other emerging nations is also spurring demand, particularly for value-added items like meat and dairy products, the report said.
"We are sitting on structural changes that will affect agricultural prices for a long time to come," Paul Polman, chief financial officer of Nestlé, the world's largest food company, said last month.
"Central banks need to be very alert and learn from other experiences, such as happened in the 1970s," José Darío Uribe, general manager of the Colombian central bank, said in an interview. In the 1970s, monetary officials were slow to respond to rising prices for oil and food. As a result, U.S. inflation averaged 7.1 percent in the decade, compared with 2.75 percent so far this decade.
The risk, though, is that inflation could accelerate. With prices of many everyday items starting to rise, the danger is that consumers and companies will become more pessimistic about the outlook for inflation.
"Nothing affects consumer inflation expectations more than food," said Richard Yamarone, chief economist at Argus Research in New York. "Not everybody has to drive to work, but everybody wakes up and has breakfast."
Joe Carson, director of economic research at AllianceBernstein in New York, said rising food prices could keep the Federal Reserve on alert, even though the annual increase in the core measure has fallen within the range of 1 percent to 2 percent that some bank officials said they were comfortable with.
Economists, including some at the Bank of England, have criticized the bank's focus on core prices, arguing that it ignores the inflationary impact of rapid global growth on commodities like oil.
Federal Reserve officials have said their long-term objective is to keep overall inflation low. They justify their use of core prices as an intermediate goal because the measure has proven in the past to be a better indicator of underlying price pressures than the broader, so-called headline measure.
Higher food prices pose even more of a danger for China and poorer nations, where consumers spend a greater share of their income feeding themselves. Food accounts for a third of China's consumer price index, more than double the percentage in the United State |
