Rising food prices can be hugely destabilizing.
While energy prices are a constant risk to inflation in countries around the world, several emerging market countries face a different problem: the pace of food price inflation makes their currencies vulnerable.
The UN’s February World Food Price Index, released on Friday, was essentially unchanged at 20.7% y/y from 19.2% in January, perhaps surprisingly given the runaway rally in food prices. staples such as corn and wheat. But measures of inflation in general are severely lagging indicators, and the index should soon begin to reflect the recent upticks in soft commodity prices.
Monday’s acceleration in energy prices poses an additional risk to food prices, given that oil is a key component in fertilizers. Furthermore, food prices often lead overall global inflation. The chart below shows that, as things stand, the global CPI should decline over the next three to nine months, but there are upside risks if energy prices remain elevated.
However, the headline CPI masks some important underlying divergences, with emerging market inflation, already rising much faster than developed market inflation, highly exposed to rising food prices.
This is because food accounts for a much larger percentage of overall CPI baskets in emerging markets compared to developed countries. Food accounts for almost half of the CPI basket in India, and more than 30% in the Philippines, China and Russia, while in European countries it is around 10-15% and in the US it is only around 8 %.
As seen in the Arab Spring in the early 2010s, rising food prices can be hugely destabilizing. The impact they are having on headline inflation is growing and therefore the risk they pose to EM governments is increasing. For the median emerging country, food accounts for almost a third of the current year-on-year headline CPI. In Russia, almost half of the current level of 8.7 of the CPI comes from food, while in the US, UK and much of Europe, food currently accounts for only 10% or less of the CPI general.
Food inflation poses a risk to currencies. We can plot the six-month change in the food CPI contribution to the stock against the six-month change in each country’s currency. We can see from the chart below that the Taiwanese dollar, Mexican peso, Colombian peso, ringgit, rupee and yuan all look vulnerable among emerging currencies due to rising food prices. Turkey is literally off the chart with food adding an additional 8.5% points to the CPI in the last six months, while Russia’s currency has already tanked due to sanctions.
And as currencies weaken, the risk of an inflationary spiral in emerging markets increases as the cost of imported goods rises further.
NOTE: This was a post on Bloomberg’s Markets Live blog. The comments are those of the blogger and are not intended as investment advice. For more market analysis, go to MLIV.