Emerging market inflation: Food inflation puts pain in emerging markets
The 49-year-old, who works in an auto repair shop in Istanbul, Turkey’s largest city, and lives at his father’s house with his wife and two children, says fresh produce is often beyond the reach of his family to live with pasta, bulgur and peas. .
“Everything has become so expensive, we can’t buy and eat what we want – we can buy what we can afford now,” said Jamie. “My kids are not getting proper nutrition.”
Global food prices have risen for two years, due to the Covid-19 disruption and weather problems. The push for grain and oil supplies from Russia’s invasion of Ukraine hit their all-time record in February and again in March.
Rising inflation has added to the pressure on rising energy prices. Annual inflation in Turkey or Argentina may be around 70% and around 60%, but in countries from Brazil to Hungary, the reading is in double digits. This makes US inflation relatively modest at 8.3%.
Rising food prices are a hot topic in emerging markets, with the echo of the Arab Spring increasing the risk of civic instability and forcing policymakers to take steps to reduce the pain of their populations or to save government money with financial assistance.
Food is the single largest category in the inflation basket – the selection of products used to calculate the cost of living – in many developing countries, about half in countries like India or Pakistan and about 40% in low-income countries, the International Monetary Fund data shows.
Food producers have become more protective: India announced a ban on wheat exports over the weekend when Indonesia stopped exporting palm oil in late April to control rising domestic prices.
And with the war in Ukraine disrupting not only food but also fertilizer supplies, food inflation could become more protracted, says Marcelo Carvalho, head of global emerging market research
“It’s here to stay,” Carvalho said. “Food is very important – when food prices change, the perception of inflation becomes bigger – which feeds the expectation of inflation which is more easily inconsistent.”
For Umm Ibrahim, a 60-year-old widow and street vendor in front of a mosque in the Egyptian capital, Cairo’s middle-class district of Madinat Nasr, feeding her four children has become more difficult.
“All the prices have gone up – clothes, vegetables, chickens, eggs – what am I going to do?” He asked, spreading his warehouse over a cloth.
Egypt, one of the world’s largest wheat importers, saw inflation rise to more than 13% in April and is expected to raise interest rates again at a meeting this week after devaluing the currency by 14% in mid-March.
Emerging market policymakers need to balance interest rates by hundreds of basis points from 2020 to reduce price pressures and ensure bond premiums for rising U.S. yields for investors, while controlling inflation and keeping fragile growth alive while raising global interest rates.
Emerging economies could expand by only 4.6% this year, the World Bank forecast, compared to the previous 6.3% forecast.
Paulina Kurdiavko, head of EM Debt at Asset Management at BlueBe, says the government has three options: to provide large subsidies to consumers or raise prices, and to deal with inflation and social unrest.
“There is no easy solution,” Kurdievko said.
Countries launch a raft system: Turkey raises minimum wage by 50% in December to deal with currency crash and inflation spike. Chile will raise the minimum wage this year as well.
The South African government is debating whether to increase a social relief grant launched in 2020 and make the project sustainable.
Economists fear that emerging economies are facing a new wave of instability behind the latest rise in food prices. Beta Zavorsik, chief economist at the European Bank for Reconstruction and Development, said food inflation in North Africa, where a decade ago was a contributor to the Arab Spring uprising, looked particularly weak.
“The irony of this war is that while everyone expected Russia to have a crisis, it is actually the North African countries that are closest to the state of emergency due to high food prices,” he said.
But the pain is expected to spread further: by the fourth quarter of 2022, three-quarters of the country is expected to be at high-risk or at high risk of civil unrest, a middle-income country, risk adviser Verisk Maplecroft said last week.
Extinguishing inflationary pressures through spending will come at a financial cost that could further reduce the problem, said Carvalho of the BNP.
“In emerging markets, financial sins are forgiven but not forgotten,” he said. “For the last few years, everyone seemed to have a blank check … partly because the rate was so low. Now that interest rates are rising, it’s become a bit more complicated.”
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