Food prices concerning for consumers, investors and central bankers
There is an air of concern both on the part of consumers, investors and central banks about the possibility of oncoming inflation and supply chain issues.
The Bank of England on Thursday suggested it is worried about the prospect of additional inflation, predicted that prices will climb above 4% over the coming months.
A specific area of concern for all parties is the cost of food.
“The United Nations’ FAO Food Price Index therefore requires attention,” says AJ Bell Investment Director Russ Mould.
The benchmark, which spans key agricultural materials such as cereals, vegetable oils, meat, dairy products and sugar, is up 33% year-on-year. That is the fastest rate since 2011.
On investors’ minds now will be whether or not food prices will be the cause of sustained inflation and if this will impact consumers’ spending levels.
“Central bankers will be watching, in case inflation forces their hand and requires a tightening of monetary policy in the form of a tapering of Quantitative Easing and higher interest rates,” says Mould.
“No doubt central bankers, to defend their view that the current spike in inflation is ‘transitory,’ will be keen to point out some of the factors involved in the food price surge. These could range from include global shipping and port bottlenecks, to a shortage of truck drivers to bad weather in countries such as Brazil, where drought and then unseasonal frost is badly affecting supply of oranges and coffee to the global market.”
In many cases, the best solution for high prices is high prices. It can choke off demand or encourage additional supply. “The latter may happen in time, if the weather helps, but it is not easy for people to stop eating, as they need their daily calorific intake,” says Mould.