Analysis: Food inflation pain puts emerging markets between a rock and a hard place

  • Food accounts for 40% of CPI baskets in low-income countries
  • UN Food Price Index Hits Record in February and March
  • More governments choose to introduce support measures
  • Risk of social unrest is on the rise over food, fuel price rises

LONDON/ISTANBUL/CAIRO, May 17 (Reuters) – As for millions of people in developing countries and emerging markets around the world, buying basic food has turned from a necessity into a luxury for Selcuk Gemici.

The 49-year-old, who works in a car repair shop in Turkey’s largest city, Istanbul, and lives with his wife and two children in his father’s house, says fresh produce is often out within reach of his family who lives on pasta, bulgur and beans. .

“Everything became so expensive that we can’t buy and eat what we want, we only buy what we can afford now,” Gemici said. “My children are not well fed.”

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Global food prices have been on the rise for two years, fueled by disruptions from COVID-19 and weather issues. Supply shocks for grains and oils following Russia’s invasion of Ukraine caused them to hit an all-time high in February and again in March. read more

Inflation rates have skyrocketed, and rising energy prices add to the pressure. Turkey or Argentina with annual inflation of 70% and around 60% could be outliers, but the readings are in the double digits in countries from Brazil to Hungary. It makes US inflation of 8.3% seem modest by comparison.

Rising food prices are a hot topic in emerging markets, raising the risk of civil unrest with echoes of the Arab Spring and putting policymakers in a bind between intervening with fiscal support to ease the pain of its population or preserve public finances.

Food is the single largest category in inflation baskets (the selection of goods used to calculate the cost of living) in many developing nations, accounting for around half in countries like India or Pakistan and on average around 40%. in low-income countries. Data from the International Monetary Fund show.

Food producers have become more protective: India announced a ban on wheat exports over the weekend, while Indonesia halted palm oil exports to rein in rising prices in the country in late April. read more

Rising wheat and rising food prices fuel inflation

And since the war in Ukraine disrupted not only food supplies but also fertilizer supplies, food inflation could be more lasting, Marcelo Carvalho, head of global emerging markets research at BNP Paribas, told Reuters.

“This is here to stay,” Carvalho said. “Food is very prominent, when there is a change in food prices, the perception about inflation is magnified, that feeds inflation expectations that are more easily unanchored.”

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For Um Ibrahim, a 60-year-old widow and hawker of headscarves outside a mosque in the middle-class Madinet Nasr district of Egypt’s capital Cairo, feeding her four children has become much more difficult. .

“All prices went up: clothes, vegetables, poultry, eggs, what am I going to do?” she asked her, placing her crockery on a cloth.

Egypt, one of the world’s biggest wheat importers, saw inflation rise above 13 percent in April, and is expected to raise interest rates again at a meeting this week after it devalued the currency by 14 percent. % at the middle of March. read more

Policymakers in emerging markets, which have raised interest rates by hundreds of basis points cumulatively since 2020 to curb price pressures and ensure a bond premium for investors in the face of rising US yields The US has to strike a balancing act between reining in inflation and keeping fragile growth alive at a time of rising global interest rates.

Emerging economies may expand just 4.6% this year, the World Bank forecasts, compared with an earlier prediction of 6.3%.

Emerging Market Inflation

Polina Kurdyavko, head of emerging market debt at BlueBay Asset Management, says governments have three options: provide greater subsidies to consumers or bite the bullet of letting prices rise and deal with inflation and social unrest, or do something in between

“There are no easy solutions,” Kurdyavko said.

A number of countries have introduced measures: Turkey raised the minimum wage by 50% in December to deal with a falling currency and rising inflation. read more Chile will also increase the minimum wage this year. read more

The South African government is debating whether to increase a social relief grant launched in 2020 and make the plan permanent. read more

Economists fear that emerging economies face a new wave of unrest in the wake of the latest increases in food prices. North Africa, where food inflation contributed to the Arab Spring unrest a decade ago, seemed particularly vulnerable, said Beata Javorcic, chief economist at the European Bank for Reconstruction and Development.

“The irony of this war is that while everyone expected Russia to have a crisis, it is actually the North African countries that are closest to having an emergency situation due to high food prices,” he said. .

But the pain is expected to spread further: Three-quarters of the nations expected to be at high risk or extreme risk of civil unrest by the fourth quarter of 2022 were middle-income countries, the research consultancy said last week. Verisk Maplecroft risks.

Calming inflationary pressures through spending will have a fiscal cost that could spell trouble later, BNP’s Carvalho said.

“In emerging markets, fiscal sins are forgiven but not forgotten,” he said. “For the last two years, everyone felt like they had a blank check … partly because rates were so low. Now that interest rates are going up, it gets a little more complicated.”

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Information from Karin Strohecker; Additional reporting by Jorgelina do Rosario; Edited by David Evans

Our standards: the Thomson Reuters Trust Principles.

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