Food inflation a key economic risk

A sustained rise in global food prices, together with rand weakness, could lead to higher food inflation and and consumer inflation in general — but according to Stanlib economist Kevin Lings, we shouldn’t panic.

The strength of the rand and some margin compression among food manufacturers have cushioned us thus far.

That said, food inflation is still a key economic risk this year.

The Economist Monthly Commodity Price Index for food recorded its highest level ever at the end of last year. The record 225 index points is higher than the 220,9 recorded in June 2008 — previously the highest level. At the time, the June high was the highest level food prices had recorded in 30 years.

Food prices have jumped 31,9% in a year, in dollar terms — this is still well below the rate of increasing occurring in 2008 when global food prices rose by 69%, leading to food riots. But considering prices were in deflation as recently as June 2010, it’s clear there’s been an alarming increase in food prices over the past six months. The United Nations Food and Agricultural Organisation’s data shows a similar trend.

Why is this?

According to Lings, a broad-based increase in agricultural prices, including sugar and meat, is now reflecting in the consumer food inflation rate of various countries, including China, India, the US and parts of the Eurozone. Food inflation is on the rise and the situation is being aggravated by erratic weather conditions and the perception that food security is under threat.

Although our food inflation is well contained at just 1,1% as at November, and an average of less than 1% for 2010 as a whole, global pressures could still put us at risk. In a worst-case scenario, government could look at stock levels relative to potential demand to try to secure supply contracts if there are any concerns, but at the same time avoid trade restrictions, Lings says.

* Look out for Smart Money’s tip later this week on which foods are cheapest.

Read more news, blogs, tips and Q&As in our Smart Money section. Post questions on the site for independent and researched information

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