Food prices fuel inflation fears for banks By RICH MILLER and BOB WILLIS - The Age | Friday, 20 July 2007
GRAIN STRAINS: China has raised its corn output to meet the demand for agricultural products to make ethanol and substitutes for crude oil prices.
Rising prices for food, from yoghurt in the United States to steak in South Africa, are causing heartburn at the world's most powerful central banks.
The fastest increase in food- commodity prices in at least a decade has already led monetary authorities in Britain, Mexico, Chile and South Africa to lift borrowing costs.
It is also sowing doubts about the United States Federal Reserve's focus on core inflation, which excludes food and energy, and about China's gradual approach to tightening credit.
Central bank officials worldwide are anxious that climbing costs may trigger consumer concerns about faster inflation. To keep them from being self-fulfilling, some of the biggest economies might have to push interest rates higher.
"Central banks are more conscious than they've ever been of the danger of allowing inflation expectations to become unmoored," says Louis Crandall, chief economist at Wrightson ICAP LLC, a unit of ICAP, the world's biggest broker for banks and other institutions that trade in financial markets.
An unprecedented surge in global demand is behind the 23 per cent rise in food prices that the International Monetary Fund recorded in the past 18 months.
"We haven't seen anything on this scale before," says Martin von Lampe, an agricultural economist in Paris at the Organisation for Economic Cooperation and Development.
The demand, triggered in part by the increasing use of agricultural commodities to make ethanol and other substitutes for crude oil, might keep prices high for years.
The OECD sees US output of corn- based ethanol and European consumption of oilseeds for biofuels doubling by 2016.
Chinese and Brazilian production of ethanol will expand even faster, it said in a July 4 report with the United Nations' Food and Agriculture Organisation.
Rising prosperity in China and other emerging nations is also spurring demand, particularly for value- added items such as meat and dairy products, the report said.
"We are sitting on structural changes that will affect agricultural prices for a long time to come," Paul Polman, chief financial officer of Nestle, the world's biggest food company, said last month.
The US Department of Agriculture's estimate for global inventories of grain are at the lowest level in 30 years in terms of days of consumption, says Carl Weinberg, chief economist for High Frequency Economics.
"Central banks need to be very alert and learn from other experiences, such as happened in the 1970s," Jose Dario Uribe, general manager of Colombia's central bank, said. Back then, monetary officials were slow to respond to rising prices for oil and food.
As a result, US inflation averaged 7.1 per cent in the 1970s, compared with 2.75 per cent so far this decade.
The risk, though, is that inflation could accelerate. Premier Foods, the British maker of Hovis bread, said on July 9 that it planned to increase prices.
German brewers are also raising prices to compensate for the higher cost of barley as farmers switch to crops used for biofuels.
With prices of many everyday items starting to rise, many will become more pessimistic about the outlook for inflation.
