Food for thought

One of the interesting things about the recent recession was the dilemma that it posed for governments. As aggregate demand fell, unemployment rose, incomes fell, which reduced demand further and so national output began to decline. Obviously there were many other factors contributing to this decline, in particular the housing market, but the long and the short of it is, aggregate demand was falling. With the AD curve shifting inwards, we would expect the average price level to fall at the same time: i.e. inflation doesn’t tend to be much of a problem during a recession. It is this fact that posed something of a dilemma. In the recession, not only was aggregate demand low, but inflation was rising. The explanation for this: in large part due to rising commodity prices – a supply-side shock. Governments had to deal with low national output and inflation: this combination made policy changes much more complex.

While prices for many goods and commodities did fall significantly after their peak in 2008, there has been a gradual rise again and there seems to be no end in sight. Headline food prices, in particular, have increased almost to their 2008 levels, although in real terms prices are still lower. Onions in India; cabbage, pork and mackerel in South Korea; chillies in Indonesia – the list goes on. The rapidly rising prices of these basic foodstuffs has, in many cases, led to emergency government intervention. However, there are fewer concerns this time round, as many hope that the causes of these higher prices are not just the increases in demand but crucially temporary supply shocks. Bloomberg’s Businessweek Assistant Managing Editor, Sheelah Kolhatkar, said:

There are a lot of reasons [for rising prices]. Weather is cited as a big one. There’s been sort of freak weather in different parts of the world. Russia experienced a drought. There are floods in Australia. There’s been sort of freezing weather in Florida. Our own Midwest experienced flooding earlier this year. And because the market for a lot of these food commodities is global, when something strange happens somewhere, that can affect a crop.

On the other hand, there are growing concerns at the timing of this inflation: the developed world has barely escaped from recession. How is it that inflation can already be a problem? Furthermore, with loose monetary policy in many countries, rising food and commodity prices could continue for some time.

An interesting question to consider is which countries will be affected the most? In Britain, like other developed countries, food consumption accounts for between 15 and 20 per cent of a household budget. However, in developing countries, food can take up between 50 and 75 per cent of a houshold budget, so any rise in food prices is disastrous.

What does it mean for the recovery? Well, if food (a necessity) is increasing in price, households have little choice but to pay the higher prices. This means they have less disposable income for other goods, hence aggregate demand may be adversely affected. The following articles will hopefully give you some ‘food for thought’!

Articles

Soaring food prices cast shadow over trading Financial Times, Dave Shellock (14/1/11)
Next shock will be high food prices Sydney Morning Herald (17/1/11)
Commodities can still shock BBC News blogs, Stephanomics, Stephanie Flanders (13/1/11)
Many countries face catastrophe as inflation creeps up the food chain Independent, Hamish McRae (16/1/11)
Soaring demand soaks food oil reserves Sydney Morning Herald, Luzi Ann Javier (17/1/11)
Government to subsidise essential food items Sunday Observer, Gammi Warushamana (16/1/11)
Brace for higher food prices Jamaica Observer, Julia Richardson (16/1/11)
Jordanians protest against soaring food prices Guardian, Johnny McDevitt (15/1/11)
Inflation, the old enemy, is back. But this is no time to be frightened Guardian, Larry Elliott (16/1/11)
Global effort to calm food prices Washington Post, Steve Mufson (15/1/11)
The link between commodity prices and Monetary Policy Seeking Alpha (14/1/11)
Australian floods bost commodity prices, shares and funds Telegraph, Ian Cowie (13/1/11)
Soaring cost of oil and food will result in turmoil Belfast Telegraph Hamish McRae (18/1/11)
Q&A: Why food prices and fuel costs are going up BBC News (14/1/11)

Data

Commodity Prices Index Mundi

Questions