Food prices are expected to remain high amid war, expensive energy, and weather phenomena, estimates the International Monetary Fund (IMF) in its analysis (signed by Christian Bogmans, Andrea Pescatori, Ervin Prifti).
To better understand the scale of these unprecedented challenges for policymakers globally, the typical impact of four historically significant factors affecting food commodity prices. The analysis, published as part of the October special features in the latest World Economic Outlook, shows that.
- A 1% drop in world harvests increases the prices of essential food products by 8.5%.
- A 1% increase in the Federal Reserve’s key interest rate lowers food staple prices by 13% after one quarter.
- A 1% increase in the Federal Reserve’s key interest rate lowers food staple prices by 13% after one quarter.
- A 1% increase in fertilizer prices, which have recently been boosted by soaring natural gas, boosts food staple prices by 0.45%.
- A 1% increase in oil prices increases the prices of essential food products by 0.2%.
These estimates can better explain recent food price movements and help set the outlook, as different factors can exert opposing forces. According to the UN’s World Meteorological Organization, La Niña weather conditions are expected to return for a third straight year, bringing below-average water temperatures to the east-central Pacific Ocean.
Similar three-year periods occurred during the first global food crisis between 1973-76 and between 1998-2001, adding that the Black Sea Grains Initiative, which provides safe export shipping from Ukraine, could cause another shock to grain supplies if suspended again by Russia. This alone would reduce global wheat and corn supplies by 1.5%, relative to current expectations, and increase cereal prices by 10% within a year.
The Federal Reserve, for example, is raising borrowing costs at the fastest rate in two decades. Higher interest rates tend to reduce speculative activities in the markets, thus putting downward pressure on food prices. Fed’s tightening has already helped lower grain prices since April and will continue to put downward pressure on prices through the end of next year.
However, the risk that food prices will rise again rather than fall in the next two quarters remains high. And if those risks weren’t enough, the impact of rising interest rates on food insecurity could be mixed. This is because a slowdown in economic activity can reduce personal incomes. Combined with the still high food prices, this could increase the number of food insecure people.
Regarding the behavior of global indices on a weekly basis, S&P 500 lost -3,37%, Dow Jones Industrial Average -2,71%, Nasdaq Composite -3,59%, and DAX in Europe lost -1,09%.