Food Prices May Sow Seeds of Next Inflation Crisis, Nomura Says

(Bloomberg) -- As surging energy prices drove inflation in major economies to multi-decade highs and caught central bankers off guard, the next source of pressure could come from food prices, according to Nomura Holdings Inc. 

“Food has a much larger weighting in the CPI than energy and particularly so in emerging market economies,” Nomura analysts led by Rob Subbaraman said in a research report. “It’s in food prices where the seeds of the next crisis may already be sown,” they said, adding that high energy prices are likely to have strong second-round effects on food.

Rising energy costs, supply chain bottlenecks and post-lockdown demand have combined to fuel faster global inflation. U.S. consumer prices rose last month at the fastest annual pace since 1990 and China’s factory-gate inflation is at a 26-year high.  

Even before the Covid crisis, there were fundamental supply-demand factors that pointed to a surge in food prices, Nomura said, adding that such dynamics have been amplified by the pandemic and the rise in energy costs. 

Under the hypothetical scenario of a 15% rise in global food prices by the end of 2022, the analysts saw rising inflation expectations pushing central banks toward “earlier and swifter policy tightening.” 

Another potential impact would come from the “inelastic” nature of food consumption, which could reduce households’ real disposable income available for other goods and services. The latter would put downward pressure on inflation, requiring central banks to gauge the outcome of the opposing forces. 

The report showed: 

• For the European Central Bank, a 15% food-price shock could push headline CPI above 4% by end-2022, versus the current consensus of less than 2%. With the ECB likely to have ended its pandemic emergency purchase program by then, markets may be asking how soon will rates be hiked.
• Food prices may be less of a problem for the Bank of England and the Federal Reserve due to their smaller weighting in the CPI basket. Even so, a 15% surge in food prices could lift headline CPI by a further 1.5 percentage points relative to current forecasts for both the U.S. and the U.K.

“The spike in energy prices we’ve seen is now well factored into inflation forecasts,” the analysts said. 

“But the possible spillover of that energy spike into food prices is less often spoken of,” and may cause a substantial inflation surprise next year that could force central banks to revise up their forecasts, according to Nomura.  

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