Jargon Buster: 'Agflation'

The recent surge in food and grain prices worldwide has spawned a new term in global economics: 'agflation'.  Expanding constraints on food supply, coupled with a partly ethanol-driven increase in demand, have spurred prices for agricultural goods.  This may gradually ‘bleed through’ into global ‘core’ inflation.

Supply constraints include: 

• changing weather patterns, bringing frosts in Australia -- a huge wheat exporter -- and drought in Florida, a large producer of oranges and sugarcane;
• swine fever in China, which pushes up local pork prices; and
• developing world industrialisation, causing the loss of fertile land.

The emergence of the energy business as a mass consumer of agricultural produce also contributes to price rises.  Many US farmers now feed subsidised ethanol 'biofuel' production, using corn as an input, thereby cutting the supply of corn for human consumption. 

No relief ahead

The IMF forecasts that food-price inflation is likely to remain high in 2007 and beyond.  The Fund says that rising demand for biofuels will cause the price of corn to rise further.  Higher prices of corn will push up the price of derivatives such as the corn syrup used in soft drinks, and partial substitutes, such as wheat, rice and other edible oils. There will also be upward pressure on meat, dairy, and poultry prices due to the rising cost of corn feedstock.

Higher interest rates will not control food price inflation. While the competitive nature of supermarkets allows some of the effects of agflation to be absorbed, stores are increasingly prepared to pass price increases on in to customers.  The era of cheap food may be ending, with consequences for both low-income households and the broader economy.