A number of EMs – notably Brazil, Mexico and Korea – have experienced strong increases in food inflation in recent months, which have pushed up headline rates. But we think that food inflation in the worst-affected countries is close to a peak. Even if it continues to edge higher for a few more months, most central banks are unlikely to be spooked.
- A number of EMs – notably Brazil, Mexico and Korea – have experienced strong increases in food inflation in recent months, which have pushed up headline rates. But we think that food inflation in the worst-affected countries is close to a peak. Even if it continues to edge higher for a few more months, most central banks are unlikely to be spooked.
- At a global level, food inflation has recently started to fall as the effects of supply shortages and lockdown stockpiling have eased. Meanwhile, a recovery in pork supply has continued to pull down food inflation in China. That said, food inflation in other EMs is on the rise. (See Chart 1.) It is running at a nine-year high (of 7% y/y) in Korea and a four-year high (of 9.9%) in Brazil. Since the start of the year, food inflation has also risen in Turkey, Mexico, Saudi Arabia, Russia, South Africa and Peru. (See Chart 2.)
- We doubt that this continued climb in food inflation will concern most central banks, for two reasons. First, in most cases higher food inflation does not appear to reflect demand-side pressures. Admittedly, the shift away from restaurant spending towards more supermarket purchases may have pushed up prices of some food items – particularly in Brazil. But generally speaking, higher food inflation seems to have been driven more by adverse weather conditions (Korea, Thailand, Brazil), VAT hikes (Saudi Arabia) and/or global supply disruptions (Mexico, Brazil). These forces lie outside the influence of monetary policy.
- Second, while food inflation is notoriously difficult to predict, we think that it is close to a peak in most cases. The myriad factors pushing up Brazilian food inflation should start to fade around the turn of the year. Elsewhere, September’s mid-month inflation data from Mexico suggest that rice inflation (a key driver of higher food inflation there) may have peaked.
- Meanwhile, the historical seasonal pattern of fresh food prices in Korea suggests that these will fall sharply in the near term, pushing year-on-year rates significantly lower by year-end. A bumper harvest in India during the remainder of the monsoon season will soon bring down food inflation there. More generally, a fall in global agricultural prices (which we expect over the next year) and the appreciation in EM currencies since their March lows should put downwards pressure on imported food inflation.
- In some EMs, the decline in food inflation that we expect may be offset by higher fuel inflation, as the fall in global oil prices earlier this year drops out of the annual comparison. But with core inflation historically weak in most EMs and output gaps large, we think that most central banks will look through the volatility around food and fuel inflation and keep monetary policy looser than investors are pricing in.
Chart 1: EM Food Prices (% y/y)
Chart 2: Change in % y/y Food Inflation Between Jan. & Aug., %-pts)
Sources: Refinitiv, CEIC, Capital Economics
Edward Glossop, Senior Emerging Markets Economist, email@example.com