Standard Chartered's Ethan Lester and Madhur Jha analyze how rising oil prices can rapidly increase global food inflation through higher fertilizer costs and trade disruptions. They highlight that the impact on food inflation will depend on the share of food in CPI baskets, import dependence, and dietary habits. They identify upward risks to food CPI inflation, particularly in regions where fertilizer affordability is already a concern.
Implementation of oil, fertilizer and global food CPI.
Higher oil prices tend to rapidly affect food prices due to increasing fertilizer costs; the global trade in fertilizers has a significantly greater exposure to the Strait of Hormuz compared to other producer inputs.
Since the US/Israel-Iran war began, governments have avoided introducing new market actions to directly control food CPI inflation. This is because price rises in natural gas, which is more crucial for making fertilizers than oil, have usually been short-lived compared to big jumps in global oil prices. Also, governments have strong long-term support for the agriculture sector.
But the cost of fertilizers was already becoming harder to manage because of recent protectionist actions by big trading countries, like China and the EU, which means there's a risk of higher food price inflation even before energy prices went up.
Global food prices and overall inflation, as shown in headline CPI data, often move together closely. The IMF also says that if oil prices go up by 10% over a year, it could lead to an increase in global inflation of about 40 basis points.
Consumer psychology is probably the main reason why food CPI inflation differs a lot between countries, because there's a lot of evidence showing that people pay close attention to the prices of the things they buy often.
Implementation of oil, fertilizer and global food CPI.
Higher oil prices tend to rapidly affect food prices due to increasing fertilizer costs; the global trade in fertilizers has a significantly greater exposure to the Strait of Hormuz compared to other producer inputs.
Since the US/Israel-Iran war began, governments have avoided introducing new market actions to directly control food CPI inflation. This is because price rises in natural gas, which is more crucial for making fertilizers than oil, have usually been short-lived compared to big jumps in global oil prices. Also, governments have strong long-term support for the agriculture sector.
But the cost of fertilizers was already becoming harder to manage because of recent protectionist actions by big trading countries, like China and the EU, which means there's a risk of higher food price inflation even before energy prices went up.
Global food prices and overall inflation, as shown in headline CPI data, often move together closely. The IMF also says that if oil prices go up by 10% over a year, it could lead to an increase in global inflation of about 40 basis points.
Consumer psychology is probably the main reason why food CPI inflation differs a lot between countries, because there's a lot of evidence showing that people pay close attention to the prices of the things they buy often.
