A Whole New Inflationary Threat Is On The Horizon...

The Commodity Research Bureau’s BLS Foodstuffs index — a composite of prices of hogs, steers, lard, butter, soybean oil, cocoa, corn, Kansas City wheat, Minneapolis wheat, and sugar — has suddenly exploded higher in 2014 following a multi-year slide from all-time highs, as chart 1 illustrates.

In the year to date, the index is up 14.9%, marking an upside move more than two standard deviations above the historical 3-month average return. Simply put, food markets are seeing prices increase at a pace reminiscent of the historic surge of 2010 and 2011, in the run-up to the high.

One of the biggest factors driving global disinflation over the past three years or so has been the slide in commodity prices. Therefore, if the current uptrend continues, it will likely have major implications for the global economy.

Unfortunately, this is not the sort of “demand-pull” inflation that policymakers so strongly desire, but rather the sort of “cost-push” inflation that can hit the consumer where it hurts.

“This sharp rise in food prices could prove a significant problem for some economies ahead, particularly as many currencies have weakened considerably, making imports more expensive,” says Bartosz Pawlowski, global head of EM strategy at BNP Paribas.

Pawlowski figures the most exposed countries are those whose food imports comprise the largest share of total imports and have seen their currencies slide most against the dollar over the last year.

Food imports versus annual change in USD exchange ratesWTO, BNP ParibasChart 2: Food’s share of total imports versus annual change in USD exchange rates.

That means the Philippines, Colombia, Kazakhstan, Indonesia and Russia (see chart 2).

“Obviously, we do not know whether the recent spike in commodity prices will be sustained,” says Pawlowski.

“Perhaps it is just the result of heightened geopolitical pressures and could prove temporary. Then again, it is also possible that the reason might be the weather, which has been somewhat unpredictable of late. In fact, the Climate Prediction Centre issued an El Niño watch status this week, saying that the probability of this phenomenon occurring later in the year has increased to 50%. While this doesn’t mean that El Niño conditions will necessarily happen, the growing risk of such an event could keep food prices supported.”

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