Ignore QE2, the main driver behind food price inflation around the world is weather and rising demand, according to the latest World Economic Outlook report from the IMF (HT FT Alphaville).The report suggests that while there was concern QE2 was what was driving emerging markets inflation, it’s now clear, with the slowdown in capital flowing into those economies (out recently), that it’s not the key.
The IMF suggests it is a combination of rising demand and “supply shocks.” But what’s causing those supply shocks?
From the IMF (emphasis ours):
As for non-oil commodities, weather-related crop damage was greater than expected in late 2010, and price effects are expected to unwind only after the 2011 crop season. As a result, non-oil commodity prices are expected to increase by 11 per cent in 2011. Near-term risks are now to the upside for most commodity classes.
So the emerging markets inflation story has a lot more to do with rising demand, brought on by a growing middle class and changing consumption habits, coupled with a terrible year for crop related weather, than QE2.
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