The Changing Drivers of Food Inflation – Macroeconomics, Inflation, and War

Abstract

The inflation surge in recent years is having profound social, economic, and political consequences. In particular, food price increases strongly affect low-income segments of the population. What makes this period so unusual is the breadth of price pressures that are affecting both low and high-income countries. In essence, this means that price movements increasingly synchronize across borders. This study examines price developments across countries and over time and investigates the driving factors behind current inflation trends and food price hikes. Our analysis reveals that a complex mix of causes has led to the soaring food prices seen in 2021-2022. The spread of COVID-19 produced disruptions in the world’s supply chains, pushing the cost of producing and transporting food upward. The increase in fertilizer and energy prices has further exacerbated production costs for agricultural products. Droughts in parts of Africa, Asia, and the Americas damaged harvests, and fueled prices. The war in Ukraine and the associated trade blockade of grain exports created additional supply shortages. Additional pressures included speculative activities in financial markets, which were already at play before the Russia-Ukraine war. In spite of all these increases in costs, inflation could perhaps have been kept under control by immediate, sufficiently restrictive monetary policies by Central Banks. Most likely, the main cause of the strong inflationary surge in several countries seems to have been the failure of some Central Banks to rapidly intervene to counteract the effects of overall price increases including key staples. Soaring inflation is continuing to make vulnerable countries hungrier and poorer and, therefore, prompt actions necessary to help them.