27 January 2011

Food prices up again...

Food prices are once again posing problems for monetary policy, across the globe. A recent article by Luis AV Catão and  Roberto Chang 'Global food prices and inflation targeting' gives an overview of the issues at hand, arguing that 'food tends to have stronger predictive power on global inflation cycles than oil. The problem is more severe in emerging markets where consumption basket weights for food are two or three times larger than in rich nations. Central banks should pay close attention.'
The Reserve Bank of India had flagged this issue sometime back, looking at the structural reasons and a speech by Deputy Governor Subir Gokarn had focused on the changing consumption patterns that had raised the price of proteins, 'Persistent price increases in commodities for which there are no effective substitutes will, other things remaining equal, raise the potential rate of inflation over a period of time. This means that either actual inflation or interest rates will be higher than they would be in the absence of such increases.' Further, 'Rapid economic growth is contributing to the emergence of persistent demand-supply imbalances which, in turn, are making proteins more expensive. In the absence of a significant positive supply shock, this might result in the weakening of the economy's most productive resource - its people.'
Going ahead, the FAO Food Price Index can provide valuable cues to the prices, meanwhile as the FAO points out in the case of food, and Catao and Chang point out in the case of monetary policy response, short term policy actions can disrupt long term stability and coordination across the key players will be crucial to avoid aggravation of the problem world-wide.

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