May 19, 2008
Abstract: In Asia, all countries have experienced food price increases, albeit at strikingly different rates. Rising food price is a global phenomenon and has three significant macroeconomic implications, namely:
- Food subsidy. As most countries subsidize food to control the prices facing consumers, there is an inverse correlation between the subsidy bill and the true increase in food prices;
- Central banks’ room to manoeuvre. Rising food inflation restricts the central banks’ room to manoeuvre by cutting interest rates; and
- Constraints for food importing countries. Countries facing food shortages typically clamp down on exports to control domestic inflation, implying that the traditionally food importing countries simply cannot import their way out of food inflation. The characteristics of this situation support a case for collective solutions by nations.
The silver lining about high food price inflation however is that it is transitory.
Keywords: food inflation; Asia; macroeconomic policy; fiscal; subsidies; differential inflation rates; collective solutions