Still high food prices add more pressure to normalize interest rates: QNB

Persistently high food prices add more pressure to normalize interest rates, QNB said and noted central banks are tightening policy in response to “headline” inflation rather than their usual focus on inflation. “basic”.
The world is facing severe stagflation, high inflation for a decade and slowing economic growth in most major advanced economies. Soaring food prices are contributing significantly to high headline inflation in many countries, including most major advanced economies. Spain and Germany are currently experiencing food price inflation of over 10%, compared to just under 4% in Japan, QNB said in an economic commentary.

Most of the difference between countries is caused by the consumption of different types of food, for example, rice has a large weight in the Japanese food basket, but the price has actually come down over the past year . Despite the differences between countries, it is clear that food price inflation in all countries is much higher over the past year than the historical average since 1990.
Therefore, QNB focused on the four main drivers of the current high food prices in all countries: high oil and gas prices, weather effects, labor shortages and wage growth, and more recently the war in Ukraine.
First, oil and gas prices fuel high food prices in several ways. Fertilizer production consumes a lot of energy, so fertilizer prices have increased significantly.
Growing food requires fertilizers to replace nutrients used in the soil, so fertilizer prices directly affect food prices. Fuel and energy also contribute to food price inflation through the cost of processing and transporting food.
“If oil and gas prices remain high, as we expect, they will continue to put upward pressure on food prices,” QNB said.

Second, adverse weather conditions, including droughts in the United States and Brazil, reduced yields and pushed up wheat and soybean prices. Similarly, heavy rains in China and exceptionally hot weather in India also affected wheat yields and prices.
The weather is difficult to predict, but it is widely recognized that climate change is causing more frequent and extreme adverse weather conditions. This will continue to put upward pressure on average food prices.
Third, migrant labor flows have not yet returned to pre-virus levels. The agricultural sector in particular relies heavily on migrant labour, which contributes to labor shortages in many advanced economies. This in turn leads to higher costs via both higher wages and lower productivity.
Nonetheless, QNB expects migrant flows to recover as the pandemic continues to abate and, as a result, upward pressure from labor shortages will ease.
Finally, the war in Ukraine has worsened the outlook for some of the above factors, particularly rising oil and gas prices. In addition, Russia and Ukraine account for 28% of world wheat exports and 55% of world sunflower oil exports.
The war has caused major crop destruction in Ukraine, but also disrupts or completely prevents exports through the Black Sea ports. Even with an immediate ceasefire, the existing disruptions will have a big impact on this year’s harvest and will still have a negative impact for next year. Therefore, the war brings substantial and persistent upward pressure on food prices.
“Taken together, we expect the war in Ukraine and high oil and gas prices to keep food prices high, despite an easing of pressure from labor shortages, while the impact of weather remains uncertain,” QNB said.
Persistently high food inflation will continue to erode household purchasing power, reducing discretionary spending and contributing to stagnant global GDP. At the same time, the persistence of high food inflation will reduce and delay the decline in headline inflation.
“Central banks normally ‘watch’ changes in food and energy prices, as they are notoriously volatile and tend to be influenced by supply-side factors. Therefore, central banks have no control over them.
“However, central banks no longer have the luxury of doing so; given the current magnitude of the impact of food prices on inflation. Therefore, central banks are tightening policy in response to ‘headline’ inflation (including both food and energy), rather than usually focusing on ‘core’ inflation,” QNB added.

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