Why Albert Edwards Is Starting To Panic About Soaring Food Prices
>Thursday, Dec 17, 2020 - 16:41
Is it time to worry about food inflation?
The reason this has suddenly become a hot topic is because while overall inflation remains subdued (we will spare a discussion here of why the CPI is purposefully distorted to stay as low as possible - readers can catch up here, here and here), food inflation has been on a tear in recent months. In fact, it has gotten so high that earlier this week Goldman published a report looking at "The Recent Spike In Food Inflation", in which it noted that "in recent months, inflation has risen and surprised to the upside across a number of major EM economies (e.g. Turkey, South Africa, India, Brazil andRussia)." According to Goldman, one of the main drivers of these increases has been higher food inflation, which has coincided with a sharp increase in the price of some key agricultural commodities (e.g. grains, oils and soybeans)."
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Outside of major agricultural price shocks, the cross-country correlation in food inflation is generally weak, suggesting that food inflation is more typically driven by local rather than global factors. In addition, inflation in high-yield EMs is typically more sensitive to global agricultural commodity prices than in low-yielders, because food represents are latively large share of CPI baskets in low-income economies.
Although the recent rise in food price inflation has been material in some EM economies, food inflation had previously been on a downward trend this year inmost EMs, and has generally exhibited much less volatility over the past 10 years than was previously the case. Similarly, while the recent rise in global agricultural commodity prices has been significant in percentage terms, the increase has been much more limited than the sharp swings observed between 2006-2012,and it follows a prolonged period in which agricultural prices had been relatively weak.
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In short, Goldman dismisses the risk of surging food inflation especially in emerging markets, because "given the limited size of the shock to date, and with other factors (such as spare capacity) weighing on EM inflation, the recent rise in agricultural commodity prices would need to extend quite a bit further for it to have a significant and lasting effect on inflation and monetary policy across the majority of EMs."
One wonders if Goldman was just as dismissive during the food price surge observed in late 2010 that ultimately culminated in the Arab Spring of early 2011. As the Guardian reminds us:
"A decade ago this week, a young fruit seller called Mohammed Bouazizi set himself alight outside the provincial headquarters of his home town in Tunisia, in protest against local police officials who had seized his cart and produce.”
It is this backdrop that brings us a far more concerning note published this morning from everyone's favorite permabear, SocGen's Albert Edwards, who unlike Goldman is starting to worry about food inflation. A lot.
As Edwards explains, for much of the past decade he - and other Fed skeptics - have railed about the distorting impact of QE on asset prices. And aside from capital markets where the Fed's intervention has spawned a record wealth divide leading to unprecedented political and social polarization, perhaps the most disturbing episode of such distortion was the abovementioned explosion of food prices that began towards the end of 2010. According to Edwards, many economists - this website included - believe the Fed’s QE2 was the primary cause for the 2010-11 bubble in food prices which contributed to the social unrest and ensuing revolutions in many Arab countries.
This is a problem because in a time when central banks are injecting a record $1.4 billion in liquidity every hour, and when most economists’ attention is now focused on the impact of the Fed’s QE on buoyant equity and industrial commodity prices, Albert says that "we should also watch the unfolding surge in food prices very closely indeed – and with trepidation."
The reason for that is again what happened in early 2011 in Tunisia: That event marked the start of a chain reaction of social unrest around the Middle East and elsewhere that toppled governments and became known as the Arab Spring, Edwards writes and adds that "although the narrative of these revolutions had its origins in longstanding grievances and a thirst for democracy, many economists identified rocketing global food prices from the end of 2010 as the trigger. (T’was always so: certainly, higher food prices contributed to both the French and Russian revolutions, and to the 1989 unrest in China.)"
continued ….
>https://www.zerohedge.com/commodities/why-albert-edwards-starting-panic-about-soaring-food-prices
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