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The Macro Viewpoint - A focus on food inflation, security and EM-DM policy responses
16 Plays3 years ago
Paul Bloxham looks at surging commodity prices and food security risks. Ali Cakiroglu explains why food matters in EM inflation baskets, while Liz Martins measures UK food price inflation. James Pomeroy assesses the policy responses around the world. Disclaimer: To stay connected and to access free to view reports and videos from HSBC Global Research click here:
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Transcript
Introduction to Global Banking & Markets
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This is HSBC Global Viewpoint, your window into the thinking, trends and issues shaping global banking and markets.
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Thank you for listening.
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You're listening to the HSBC Global Research Macro Viewpoint, our weekly chat with our team of economists and strategists around the world.
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This podcast was recorded for publication on the 19th of May, 2022.
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All our disclosures and disclaimers must be viewed on the link attached to your media player.
Focus on Inflation, Food Security, and Policy
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Hello everybody, Piers Butler here along with Aline van Dyne.
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This week, a special focus with four of our economists and strategists on inflation and food security and policy.
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How does economic impact of surging food prices differ around the world today?
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And what has been the response from policymakers?
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Thanks Piers.
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We actually have a great lineup for the show this week.
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We're speaking to Paul Bloxham, Ali Kaguroglu, Liz Martins and James Pomeroy.
Pandemic & Conflict Effects on Food Prices
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We start with Paul Bloxham, our Chief Economist for Australia, New Zealand and Global Commodities.
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Paul, welcome.
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It's nice to be here.
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Can you set the stage for what has touched off this record-setting round of inflationary pressures on food prices?
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Yeah, for sure.
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So we start with global commodity prices already rallying through most of the pandemic.
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And of course, food prices were doing that too.
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A part of that was related to a collection of supply constraints, lack of labor, pandemic related disruptions, higher shipping costs,
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inclement weather as well.
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We've had, we're now in a second season of La Nina, but of course the primary thing that's really gotten food prices to rise sharply is the Russia-Ukraine conflict.
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Russia and Ukraine are huge producers of agricultural products.
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Russia in particular is a big producer of fertilizers as well.
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And so that's seen a sharp spike in these agricultural products.
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We've now got global food prices on the global index at an all-time high, both in nominal and real terms.
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And there are good reasons to believe that actually these commodity prices are going to stay fairly high for a period of time.
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There's lots of factors at work here that are supporting commodity prices and particularly these food prices, the ongoing conflict.
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But of course, the fact that we're having disruptions to production in the Ukraine because of the conflict, which means this will roll into another season.
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And the high cost of fertilisers is also feeding through to less use of fertilisers in other countries, which then, of course, leads to agricultural yields, which might persist for a period of time.
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So we really have got quite a crunch going on in the food space.
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Now, the focus is obviously very much on the consequences of these price rises on inflation rates around the world.
Protectionism and Food Hoarding Consequences
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But interestingly, in your latest Commodities Digest report, you look at the fallout on protectionism and the hoarding of food.
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Can you tell us a bit more about that?
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Yeah, so this is one of the more interesting aspects is that, of course, as these food prices rise and food becomes more constrained in its supply, you see countries start to take policy action.
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And we've seen quite a broad range of this.
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In fact, you know, the last time we had a similar sort of episode was back in 2007, 2008.
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And we're now looking at trade restrictions being put in place that are of a similar sort of magnitude.
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We estimate that about 17% of globally traded
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calories are now under some form of export restriction.
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Specifically, we've seen actions taken in recent times.
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If we look to Indonesia, they put a ban on exports of palm oil.
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And then even just this week, we saw India put a ban on exports of wheat.
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The challenge here, of course, is this protects food supply for particular countries, but it can also be very disruptive to supply chains and it can deliver nonlinear effects in the sense that countries take this action, it disrupts supply chains and trade, and then suddenly in some commodities you can
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can get sharp rises in prices like we saw back in 2007, 2008 that are quite hard to predict.
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That can then, of course, have broader ramifications, not just for inflation and difficulty for policymakers, but it can have geopolitical overflows as well.
Emerging Markets & Inflation Trends
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Now, I'd like to bring in our emerging markets analyst, Ali Kakeroglu, into the discussion.
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Ali has done a lot of work looking at the dominance of food as well as energy in the consumer prices indices in the emerging markets.
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Ali, thanks for joining us.
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Let's start with the CPI baskets first.
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Why such differences with the developed world?
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Well, that's the result of the different stages in economic progress.
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In developed markets, they are well advanced in their economic progress.
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So they're more service oriented economies.
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But for emerging markets, they are still emerging and trying to grow.
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So they have a larger share in items such as food, such as energy.
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And all these are leading to this difference.
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For instance, in the US, you have a share of food at around 13% in the CPI basket, while in India, the share of food is around 46%.
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So there's this huge divergence and mainly the result of the different stages in economic progress.
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So in terms of transmission, when does this food price inflation start filtering through in a significant way?
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Well, inflation in emerging markets has already been on an uptrend pretty much since the beginning of last year.
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We have already seen the highest level since 2008, and this was due to a combination of reviving domestic demand, supply-side disruptions, and higher energy prices.
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But there is definitely risks emanating from the food inflation because, as we mentioned, food has a higher share in EMCPI baskets.
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We have previously run some economic models to gauge the pass-through coming from commodity prices and in particular from food and oil.
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And our calculations suggest that the impact from oil is pretty much straightforward.
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It peaks at around the sixth and seventh quarter with roughly 0.5 percentage points for every 10 percentage increase in international oil prices.
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But for food inflation,
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the peak is much higher and lasts much longer at around 0.7 percentage point for every 10% increase and lasts for nearly 10 quarters.
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So can I just sort of follow up on that last point?
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Why is EM food inflation so much stickier and in relation to developed markets?
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Well, there are a couple of reasons for that.
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For starters, most of these countries are also producers of these agricultural commodities and there is this seasonality coming with the crops and harvest.
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So this might be one of the factors.
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The second factor could be related with the production costs.
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As Paul mentioned, you are
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having higher oil and fertiliser prices and these are having a lack of impacts on production costs of agricultural commodities.
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So there needs to be some time to filter through all these cost side pressures and the seasonality.
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Does that mean that inflation is likely to remain a more persistent issue relative to developed markets?
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We are likely to see some moderation in developed market inflation based on HSBC forecasts, but for emerging markets, the risk is for much stickier headline inflation, given the fact that food has a larger share in EMCPI weights.
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Ali and Paul, thank you very much indeed.
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Thanks.
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No worries.
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Happy to help.
Impact of Food Inflation on UK Households
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We now turn to the developed markets and inflation in the UK.
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It has jumped to a 40-year high in April with the CPI up from 7% to 9%.
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Liz Martens, senior UK economist, joins us now.
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Liz, thanks for being here.
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We've been talking about food inflation and its impact in the emerging markets.
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What's the impact in a developed market such as the UK?
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Well, of course, for a developed market, food will be less of the consumer basket.
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So in the UK, it's about 12% of the CPI index.
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But for poorer households, less well-off, they will be spending more of their monthly income on food.
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The less well-off you are, the greater that percentage will be.
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And therefore, the worse you will be hit by higher food inflation.
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And we are seeing it already in the UK.
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And it's actually leading to increased food bank use, increased reports of real genuine hardship.
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So it feeds into this broader question of the cost of living squeeze that we're really starting to become quite concerned about in the UK.
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And unfortunately,
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the evidence suggests this is going to get worse.
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So we had one of the UK's food retailers, Marks & Spencers, they're talking about food inflation rising to about 10% this year.
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And even the governor of the Bank of England, Andrew Bailey, seems really quite concerned about the food supply situation.
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He actually used the word apocalyptic in his testimony to Parliament earlier this week, referring to these kinds of issues.
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So it really is a big issue here in the UK too.
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And Liz, is that actually reflected in the UK inflation data in terms of food price impacts?
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Well, it's certainly starting to be.
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So we've just had the April CPI inflation numbers for the UK.
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And in that reading, we had food inflation of 6.7%.
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The highest reading within that was edible oils, which of course reflects the shortage of sunflower oil following the outbreak of the conflict in Ukraine.
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So it's certainly starting to come through.
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But as I say, we fear that we haven't seen the end of it yet.
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So we've actually marked up our own inflation forecast partially to reflect those increasing pressures.
UK Government's Response to Inflation
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And Liz, what is the policy response, given that inflation may not have peaked yet?
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Well, so the Bank of England is raising rates.
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They've already raised rates from 0.1% to 1%.
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We think they'll do more.
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But of course, there's not much they can do about food price inflation or energy inflation.
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Those are issues which are globally driven.
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What they can do is try to address second round effects.
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And they are somewhat concerned about those.
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But we think they sound a lot less concerned about second round effects than some other central banks.
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In terms of the other policy response, of course, that would come from the government through fiscal policy.
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And we have seen some governments around the world providing help for households who are struck by this increasing price pressures.
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In the UK, we've seen some measures, about £18 billion worth actually so far, announced in February and March, relating to
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the energy crisis, but actually they don't take into account this latest news on food inflation.
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So we'll be well above 8% for the rest of 2022.
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So there might be a case for additional measures from the UK government.
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And there's been some discussion about a windfall tax.
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The Labour Party and the opposition would like to see it.
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So far, we haven't heard too much positive noises around that from the
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from the Chancellor, Rishi Sunak.
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I do think we'll probably see some more help from households at some point, but the government may be keeping its powder dry in order to bring measures later in the year, because that's when the gas regulator Ofgem reviews the energy price caps that the UK has in place.
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And we are expecting that cap to rise again, meaning another rise in the cost of living for households.
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Liz, thanks so much.
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Thank you.
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Now we turn to policy implications elsewhere in the world.
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And to do that, James Pomeroy, our global economist, joins us.
Global Central Banks' Reactions to Inflation
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Now, James, this is of course a global story.
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How are central banks more broadly reacting to inflation and the food inflation developments in particular?
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So Liz mentioned, of course, the elevated food inflation in the UK, but on a global scale, the UK is sort of about the middle of the pack when it comes to food inflation.
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And food inflation has been particularly elevated in Latin America, double digit food inflation for the last few months.
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And this is a part of the world where central banks have really been taking
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um the pressures of inflation very very seriously we've seen very aggressive um rate rises in the likes of brazil colombia chile mexico to try and tackle um broader inflationary pressures um that are heavily driven and by these food prices um that have surged and they're worried about some of these spillovers into other parts of inflation too in the rest of the world we have seen central banks get a little bit more um hawkish and look to do a little bit more tightening
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in the course of the last few weeks and months.
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But that's not necessarily entirely driven by food inflation.
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Some of it has been energy inflation.
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Some of it has been a pickup in core inflation pressures too.
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But clearly, the longer that food prices keep rising and the further that pushes food inflation, it's going to add to broader inflationary pressures across the world and central banks may choose to react accordingly.
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So, James, are all central banks therefore looking to tighten?
China's Divergent Monetary Policy
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So most are.
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Almost every single central bank of the world is either raising rates or looks like they're going to be raising rates relatively soon.
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There's a few differences out there, the obvious ones in Japan and Switzerland, where central banks are keeping rates at these record low levels and look set to for some time.
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But even in Switzerland, we've seen a little bit of a hawkish rhetoric in the last few days.
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The big difference is in China, mainland China, the PBOC really talking about easing and rate cuts rather than rate increases.
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And this is not necessarily due to what's happening on the food front, but more so due to domestic activity weakness.
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And it's something we can see in the broader inflation data in China versus the rest of the world is you end up having this very low CPI inflation rate because businesses just can't pass on their cost increases because of weak demand.
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And therefore, even though you're starting to see food inflation in China pick up gradually, it's unlikely to be something that changes course for the central bank, where it's more about policy easing at this time rather than tightening.
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Whereas in most of the rest of the world, central banks either looking to tighten because of a rebound in the economic activity, higher inflation or a bit of both.
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James, thanks for that global perspective.
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Thank you very much.
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So that's our show for this week.
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Special thanks to Paul Bloxham, Ali Kakiruglu, Liz Martins, and James Pomeroy.
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All the research associated with this podcast is available on the research website at research.hsbc.com.
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We'll be back next week.
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Thank you for listening today.
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This has been HSBC Global Viewpoint Banking and Markets.
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For more information about anything you heard in this podcast or to learn about HSBC's global services and offerings, please visit gbm.hsbc.com.