Global Weekly Economic Monitor
Emerging Food Worries
Highlights
- The extraordinary run-up in food prices globally is eliciting increasing attention and policy responses
- Food-price inflation felt more acutely in emerging economies; it represents a bigger share of consumer price basket (figure 1)
- Unlike a central bank, monetary arrangements in emerging economies may be contributing to food-price inflation
- Inflation-targeting central banks should be able to cope with high food-price inflation, even if it causes some short-term headaches
The adverse impact of food-price inflation is likely to be felt much more in low-income emerging economies than in high-income developed ones.
Monetary policy frameworks in developed economies — revolving around flexible
exchange rates and implicit or explicit inflation-targeting by central banks — are more amenable to absorbing shocks to the economy, including food-price shocks, than are many of those in emerging economies, where the monetary authorities often target the exchange rate and have limited autonomy in setting domestic interest rates.
Asian monetary authorities continue to accumulate foreign exchange reserves rapidly. Such rapid reserve accumulation by a monetary authority is evidence that it is keeping its nominal and therefore real exchange rate too low. In such circumstances, the real exchange rate can be expected to appreciate via domestic inflation, with food-price inflation a possible expression of that.
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