4 key factors leading to higher food prices
Qatar National Bank (QNB), in its report, confirmed that the world is currently in a severe inflationary recession, with inflation at its highest level in decades and slowing economic growth in most major advanced economies.
In the report’s view, a significant rise in food prices is an important factor in increasing overall inflation rates in many countries, including most major developed economies.
He stressed that central banks usually ignored changes in food and energy prices, because they were volatile and tended to be driven by supply-side factors, and therefore had no control over them.
“Central banks can no longer ignore this given the magnitude of the current impact of food prices on inflation, so central banks are now tightening monetary policy in response to rising overall inflation, including rising food and energy prices, rather than their usual focus on underlying inflation,” the report added.
The Qatar National Bank’s weekly report said Spain and Germany are currently experiencing food price inflation of more than 10% compared to a inflation rate of just under 4% in Japan.
The report focused on the four main factors that led to the current rise in food prices in various countries:
High Oil and Gas Prices
Weather Effects
Underemployment and wage growth
War in Ukraine
How does oil affect food prices?
The report noted that oil and gas prices contribute to rising food prices in different ways, fertilizer production consumes energy intensively, as a result of which fertilizer prices have risen significantly, food cultivation requires the use of fertilizer to replace nutrients used in the soil, and thus fertilizer prices directly affect food prices.
Fuel and energy prices also contribute to the inflation of food prices by affecting the cost, processing and transportation of food.
“If oil and gas prices remain high, we expect, they will continue to increase upward pressures on food prices.”
What about weather effects?
Addressing the weather factor, the report noted that bad weather conditions, including drought in the United States and Brazil, had led to lower crop intake and higher wheat and soybean prices.
Similarly, heavy rains in China and unusually hot weather in India affected the wheat crop and its prices.
Weather is difficult to predict, but it is widely acknowledged that climate change is causing more frequent and extreme weather conditions, and this will continue to increase upward pressure on average food prices.
Migrant labour flows
Regarding the third factor, the report explained that migrant labour flows have not yet returned to pre-pandemic levels. Specifically, the agricultural sector relies on migrant labour heavily, contributing to labour shortages in many developed economies, which in turn increases costs through higher wages and lower productivity.
However, the report predicted that migrant flows will recover as the pandemic continues to recede, and that upward pressure from labor shortages will ease.
The aftermath of the war in Ukraine
With regard to the latter factor, the report noted that the war in Ukraine had led to a deterioration in expectations about some of the earlier factors, particularly with regard to higher oil and gas prices. In addition, Russia and Ukraine account for 28% of global wheat exports and 55% of the world’s sunflower oil exports.
The report noted that the war caused extensive crop destruction in Ukraine and also disrupted or completely blocked exports through Black Sea ports.
Even with the immediate ceasefire — the report says — the current turmoil will have a significant impact on this year’s harvest and will continue to have a negative impact next year. Therefore, war results in significant and persistent upward pressure on food prices.
