Agflation: more than just hunger pangs

 

Here’s what will be a new word to some people: “agflation”. Yes, it’s a bit clumsy and jargony – a conflation of agriculture and inflation, and a rough variation on “stagflation”, the period of rising prices and falling gross domestic product that Britain in particular experienced in the 1970s. But it is a word we should all get used to because it will be uttered with increasing frequency over the coming weeks and months.

Agflation, of course, is the label applied to the shocking increases in the prices of basic food stuffs that have come in bursts over the past two years or so. In the West we saw it first in orange juice and then milk. There was a global ripple when the price of wheat suddenly rocketed, followed by maize and vegetable oil. And then in China, when the price of meat and chicken jumped, the realisation began to dawn that this phenomena really would have far reaching consequences.

Last week it was the turn of rice to grab the headlines. On one day – Friday – the price jumped 10 per cent on world commodity markets. In the space of just two weeks the price of rice had increased 50 per cent, meaning the price has now doubled since the New Year.

Think about that for a moment. The price of a ubiquitous food stuff has doubled. The consequences are simply mind boggling; those affected are simply too numerous to count. One illustration of what we are looking at here came from the Philippines: emergency legislation in Manila dictates that anyone caught hoarding rice faces life imprisonment.

We should expect to see further examples of draconian, emergency measures across the globe, because the Earth’s population has to eat. The geo-political implications, again, can only be guessed at. But it is worth noting that Friday’s price spike was caused by African nations joining a stampede by southeast Asian countries to secure supplies from international rice merchants.

The economic repercussions are similarly complex. Themistoklis Fiotakis, a global strategist at Goldman Sachs, has just published a thoughtful research note on the subject, seeking to weigh the consequences. Fiotakis declares: “Trying to assess the long-term impact of the food price shock on inflation is not easy. An increase in food prices could simply be a one-off adjustment, and thus prove to be a temporary inflation pressure, especially in places where monetary policy is credible. It could even cause reductions in prices of other goods – a reduction in core inflation – as people use more of their income to support the same level of food consumption as before.

“However, it could be that increases in food inflation spark expectations for higher inflation on a broader basis. In that sense, higher food prices could lead to higher core inflation in the future.

“And to complicate things even more in some countries (China, for example), food inflation could even reflect demand pressures in the country.”

As recent calculations by Goldman show, the problem is an emerging market matter, and for the simple fact that so many of the rising economies have large populations to feed.

Overall, Fiotakis concludes that we will see a series of “second round” effects, whereby rising food prices globally will lead directly to monetary tightening in countries such as Russia, Brazil, Indonesia and South Africa, while the shock affects will be felt longest in China.

But Fiotakis was writing before the latest spike in the price of rice, referred to above. I personally cannot help wondering whether we should instead be focusing on the short-term implications rather than trying to extrapolate long-term monetary trends. What is needed, in my view, is a way of measuring the probable sensitivity of various countries to a shock such as rice doubling in price. Clearly, for all those of us living in affluent economies the consequences can be dealt with – we can simply change our diet and, at the end of the day, food amounts to just one portion of our expenditure. But in countries with large populations, many of whom are in or close to the poverty line, the impact is hard and very direct.

So, using the Middle East as an example, the real cries of pain will not come from Dubai, but from the likes of Cairo instead.

 

- Paul Murphy is associate editor of the Financial Times