Food insecurity, like body fever, is a symptom that something is not right within. Alcohol aggravates fever and inflation worsens food insecurity. Rising inflation erodes purchasing power and its effect is first sighted on food consumption.
World Bank in its August, 2022 Global Food Security update had put an alarm bell. It noted that the recent saga of high food prices had accentuated a global crisis risking millions into extreme poverty, amplifying the problems of hunger and malnutrition, and undoing the development gains.
Food Prices Index (FPI) of Food and Agriculture Organization (FAO)suggests that the current global food prices are the highest since the 1990 levels. This had an immediate economic fallout. The low- and middle-income countries and families have been hard hit as significant share of their incomes goes for food consumption compared to their high-income counterparts.
Global Food Prices: The Recent Trends
FAO’s FPI rose 55.2% between May 2020 and February 2022. The main drivers being the prices of edible oils which rose 159.4%, Sugar (63%), Dairy (50%) and that of Cereals just behind Dairy rising 48%. Meat saw 20% jump. At a country/geography level, the following are the highlights from World Bank analysis.
- 93% of low-income and lower-middle income countries and 89% of upper middle-income countries witnessed food inflation levels between 5% to 30% with majority of them facing double digit inflation
- 83% of high-income countries experienced high inflation levels (e.g. Germany- 14.8%, USA- 10.4%, Italy-10.2%, UK 9.9%)
- Africa, North America, Latin America, South Asia, Europe, and Central Asian regions had the most inflation hit countries
What caused this unprecedented food inflation?
Economic Theory tells that rising commodity prices is inflation, and it is caused by supply/cost-push or demand-pull factors. The Russia-Ukraine War, supply chain disruptions like increased fertilizer prices, moratoriums on regular exports and the prolonged Covid-19 impact on global economies were noted to be the significant causes for all-time high food prices. How do we categorize them? The first two are supply related whereas the third depicts a combination of supply and demand elements. Since Covid-19 reduced the incomes of the people, the recovery phase in different economies had triggered the demand pull element.
What has been the global policy response?
World governments, especially in those economies with weak social safety nets (SSNs), have to deal with difficult policy decisions while protecting their domestic economies from soaring food inflation. The IMF opined that international prices needed to be passed to the domestic prices. Limiting the international price pass-through is not advisable as it disrupts the supply and demand equilibrating mechanism of prices.
However, IMF Survey shows that majority of the countries limited the international price pass-through. 26 out of 31 advanced countries and 45 out of 103 emerging and developing economies announced at least one measure to limit the international price pass through. IMF suggested for a diligent policy safeguarding the vulnerable using a judicious mix of temporary cash transfers, price subsidies or import taxes “with clear sunset clauses for basic food staples”.
It is noted that most economies easily manage the year-to-year volatility in food prices compared to periodic price shocks. The latter can lead to a crisis situation triggering an unwanted downward spiral of growth process with multiple ripple effects – Food shortages, trade disruptions, rise in hunger and poverty levels, reduction of foreign exchange reserves, burdening the governments’ fiscal capacities etc.!
The current trend of global food prices are characteristic of periodic price shocks. It needs greater international cooperation with due diligence in appreciating the country specific vulnerabilities especially the low and middle income countries. This is not time for wars and trade wars!
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“Universal Public Distribution Can Bring Down Food Prices” Do you agree? Why?
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Source Article 1) Amaglobeli, David, Emine Hanedar, Gee Hee Hong, and Céline Thévenot. 2022. “Fiscal Policy for Mitigating the Social Impact of High Energy and Food Prices.” IMF Note 2022/001, International Monetary Fund, Washington, DC