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Rising Food Prices May Give Bernanke, Central Bankers Heartburn

by 5m Editor
16 July 2007, at 9:26am

US - Rising prices for food, from yogurt in the US to steak in South Africa, are causing heartburn at the world's most powerful central banks. The fastest increase in food-commodity prices in at least a decade has already led monetary authorities in England, Mexico, Chile and South Africa to lift borrowing costs.

It is also sowing doubts about the US Federal Reserve's focus on core inflation, which excludes food and energy, and about China's gradual approach to tightening credit.

As Fed Chairman Ben S. Bernanke prepares to deliver his semi-annual report to Congress this week, central-bank officials worldwide are anxious that climbing costs may trigger consumer concerns about faster inflation. To keep them from being self- fulfilling, some of the biggest economies might have to push interest rates higher.

"Central banks are more conscious than they've ever been of the danger of allowing inflation expectations to become unmoored," says Louis Crandall, chief economist at Jersey City, New Jersey-based Wrightson ICAP LLC, a unit of ICAP Plc, the world's largest broker for banks and other institutions that trade in financial markets.

An unprecedented surge in global demand is behind the 23 percent rise in food prices that the International Monetary Fund recorded during the last 18 months. "We haven't seen anything on this scale before," says Martin von Lampe, an agricultural economist in Paris at the Organization for Economic Cooperation and Development.

Triggering Demand

The demand, triggered in part by the increasing use of agricultural commodities to make ethanol and other substitutes for crude oil, may keep prices high for years. The OECD sees US output of corn-based ethanol and European consumption of oilseeds for biofuels doubling by 2016.

Chinese and Brazilian production of ethanol will expand even faster, it said in a 4 July report with the United Nations' Food and Agriculture Organisation. Rising prosperity in China and other emerging nations is also spurring demand, particularly for value-added items such as meat and dairy products, the report said.

"We are sitting on structural changes that will affect agricultural prices for a long time to come," Paul Polman, chief financial officer of Vevey, Switzerland-based Nestle SA, the world's largest food company, said last month.

Global Inventories

The US Department of Agriculture's estimate for global inventories of grain are at the lowest level in 30 years in terms of days of consumption, says Carl Weinberg, chief economist for High Frequency Economics in Valhalla, New York.

"Central banks need to be very alert and learn from other experiences, such as happened in the 1970s," Jose Dario Uribe, general manager of Colombia's central bank, said in an interview. Back then, monetary officials were slow to respond to rising prices for oil and food. As a result, US inflation averaged 7.1 percent in the 1970s, compared with 2.75 percent so far this decade.

The risk, though, is that inflation could accelerate. Premier Foods Plc, the U.K. maker of Hovis bread, said 9 July it plans to increase prices. German brewers are also raising prices to compensate for the higher cost of barley as farmers switch to crops used for biofuels.

General Mills Inc., the second-largest US cereal maker, plans a `mid-single-digit percentage increase in Yoplait yogurt prices, Chief Operating Officer Ken Powell said June 28. That follows a smaller increase in cereal prices earlier in the month by the Minneapolis-based company.

Pessimistic Outlook

With prices of many everyday items starting to rise, the danger is that consumers and companies will become more pessimistic about the outlook for inflation.

"Nothing affects consumer inflation expectations more than food," says Richard Yamarone, chief economist at Argus Research in New York. "Not everybody has to drive to work, but everybody wakes up and has breakfast."

The Bank of England suggested in its last quarterly bulletin that price changes on `highly visible' items such as food may play a big role in shaping consumer attitudes about rising prices.

Bernanke has repeatedly highlighted the importance of those attitudes in carrying out monetary policy. "The state of inflation expectations greatly influences actual inflation," he said in a July 10 speech in Cambridge, Massachusetts.

Comfortable Range

Joe Carson, director of economic research at AllianceBernstein LP in New York, says rising food prices may keep the Fed on alert, even though the annual increase in the core measure has fallen within the range of one percent to two percent that some Fed officials have said they're comfortable with.

Economists, including some at the Bank of England, have criticised the Fed's focus on core prices, arguing that it ignores the inflationary impact of rapid global growth on commodities such as oil.

Source: Bloomberg.com

5m Editor