During the current disorders in the Middle East the emphasis has been on political repression, corruption and a desire for freedom. However, escalating food prices have been a contributing factor to the disturbances and have fueled popular discontent. Now food price levels threaten to exceed the record 2007/08 levels that also triggered violence and demonstrations.
As food represents three quarters of the family budget for the poor, a sharp increase is immediately felt. The Food and Agriculture Organization (FAO) employs a basket that tracks the wholesale cost of 55 commodities including grains vegetables and dairy and meats. This basket in January rose by 3.4% compared to December.
Food prices have been driven up by unfavorable weather conditions in food producing areas ranging from Russia to Australia. The ice storm that hit the Midwestern United States with damage to winter grains will only compound the damage. According to the FAO, the high prices are going to be with us for months to come. Another serious disruption could trigger even higher prices.
The fear of rising prices can set off a vicious circle as both countries and corporations hoard commodities thus further depressing supply and triggering further increases in prices. The only consolation is the price of rice that has remained relatively stable and is therefore about half the catastrophic 2008 level.
While the poor countries are the major sufferers, the increase in food prices complicates matters for advanced economies as well. In the United States and in the United Kingdom, the central banks have deliberately kept interest rates low in the hope of stimulating business. If inflation rears its head, the usual economic antidote has been to raise interest prices. Therefore a spike in wheat or soybean prices can eventually create adverse conditions for auto sales.
Federal Reserve Chairman Ben Bernanke claims that he is not under pressure and inflation in the United States is still low. However in the bank of England, there are voices already calling for a hike in interest rates.