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Food-price inflation is dominating media headlines
across Asia. Last year alone wheat prices rose nearly
100 percent, and rice prices 45 percent. In the United
States the supermarket giant Wal-Mart is rationing rice
in an effort to prevent customer hoarding. Some
countries have experienced protests over rising food
prices.
It is
important to note that (as with any price increase) the
economic consequences of higher food prices are not
positive or negative, as such, but redistributive.
Higher
food prices are bad for food consumers (which is
everyone, of course, but in this context particularly
urban consumers). Countering that, higher food prices
are good for food producers. Money is redistributed from
urban to rural areas as food prices rise—reversing the
trend of the last decade or so of economic development,
when wealth has tended to accumulate in urban areas.
The rise
in agricultural-commodity prices means very different
things for different economies. In the advanced
industrialised economies of the Overseas Economic
Cooperation Development (OECD), a rise in food commodity
prices is not particularly significant for consumers.
Within the OECD, consumers spend very little of their
money on food. For most OECD economies, only around 15
percent of average household spending goes on food. More
important, of that 15 percent, only around a fifth (so 3
percent of household spending) is actually allocated to
agricultural commodities.
Within
the OECD, the money allocated to food consumption mainly
goes on paying someone else to prepare, cook and often
to serve the food. Nearly half of Americans’ spending on
food is food served at restaurants.
An OECD
consumer is highly unlikely to buy a bag of wheat from
his or her supermarket—instead they buy a loaf of bread
(and around 20 percent of the price goes toward the cost
of wheat and other commodities). The consumer is paying
for someone to move the wheat from a farm to a flour
mill, to make flour with the wheat, to move the flour to
a baker to bake it into bread, to package that bread,
move it to a supermarket, advertise the bread and then
to sell it to the consumer. All of which is basically
labor.
Even
something like milk, which superficially requires little
processing once it has left the farm, is still mainly
labor. In the UK, 55 percent of the price of milk bought
in a shop is labor cost, and only 45 percent of the
price of milk is actually paid to the farmer.
Within
the OECD agricultural commodities are increasing in
price, but the price inflation of labor is starting to
slow down. That suggests that food inflation will slow,
as well.
The
labor and processing content of Philippine food is lower
than in most OECD countries, while the spending on food
as a share of total household consumption is higher. The
food share of an average Filipino household’s spending
on goods and services is about 50 percent, more than
triple that of the OECD.
Indeed,
the rise in consumer price index (CPI) inflation to 8.3
percent in April (from 3.9 percent in December) reflects
the importance of food in most Filipino household’s
spending. This means the problems implied by higher food
prices will be more acute for the Philippines than in
many economies.
There
are two critical global problems with food-price
inflation, one real, one illusionary. First, food-price
increases hurt lower-income consumers in an economy more
than they hurt high-income consumers. Food is a larger
part of a low-income consumer’s total spending than it
is of a high-income consumer’s spending. That presents a
real social problem.
Second,
people are unusually sensitive to food-price changes.
Food is something that people buy on a daily basis (or
almost a daily basis). An increase in the price of food
is very “visible”—it is something people notice and
remember. That means it influences their perception
about overall inflation pressures in an economy and
about their standard of living.
Food
pricing is likely to be a sensitive issue in the coming
months. For wealthier countries, slowing labor-cost
growth will lower the rate of food-price inflation.
Lower-income economies, however, will have to hope for
lower agricultural commodity prices.
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Paul Donovan is the managing director and deputy head of
global economics of Zurich-headquartered UBS. He is
responsible for formulating and presenting the UBS
Investment Research global economic view, drawing on the
bank’s worldwide resources. Donovan took up philosophy,
politics and economics at Oxford University. He holds an
MSc in financial economics from the University of
London. In the Philippines, his column will appear
exclusively once a month in the BusinessMirror. |
