Will Food Inflation Hit Home Harder Than You Think?

03/22/2011 10:14 am EST

Focus: MARKETS

Anthony Mirhaydari

Columnist, MSN Money

Food prices rose 3.9 percent last month, the most since November 1974. And even if your wallet hasn’t felt a noticeable effect, there’s a direct historical link between rising food costs and inflation in the general markets, says Anthony Mirhaydari of MSN in this exclusive interview with MoneyShow.com.

I know you’ve done some research on food inflation, problems that we’re seeing percolating now—but do you see any similarities to historical actions?

Yeah, we’ve seen a lot of crop failures and such right now, and people are thinking, is that a short-term thing? In my research it’s looking like what happened with the 1970s food-price spike. We saw a lot of that—corn tripling in price, sugar went up something like 14-fold.

They’re putting beans in the teens.

Right, and unfortunately a lot of the situation now is really similar to what happened then. Energy prices are going up, which affects the food through fertilizer prices.

And transportation.

Right—and we have a whole generation of new consumers entering the global sphere. Back then, it was places like Mexico and Korea and Taiwan. Now it’s China and Brazil. So we’re putting new pressures on the global food supply.

In addition, back then there were also crop failures, and it really just set off this whole chain of events. Back then, there was a famous failure of the anchovy harvest in Peru—because of an El Niño event—and just thinking, well, what does fish have to do with anything?

Well, I can’t live without my anchovies.

If you trace the causes and effects of the anchovy harvest failing, that affected the price of feed for cattle, and then it just kind of snowballed. And what’s happening now, is you have problems in Russia, problems in Australia and now you’re seeing political turmoil in places like Egypt. And reactionary countries like Jordan and Algeria are starting to hoard foodstuffs like celery.

Which exacerbates the problem, doesn’t it?

Right, and so that’s increasing demand when the supply is kind of sensitive. It’s the same thing that happened in the 1970s. The US actually cut down on wheat exports in the 1970s, and places like Russia are doing the same thing now—and unfortunately, it trickled down. In the 1970s, that contributed the big rise in inflation that resulted in 21% interest rates in the early 80s. And they tried to get around the problem—and I think that’s could potentially be what we’re facing now.

Are we going to see riots in the streets here?

The good thing about kind of the developed world is that, if you’re looking at what goes into our inflation basket, food is a pretty small percentage—it’s like 15% or something. Most of it is housing and healthcare costs.

So we’re spending less of our disposable income on food then these emerging countries.

Right—but in places like in China, where it’s like 30%-plus, it could be a big problem. That’s why you’re seeing the People’s Bank of China put such an emphasis on getting around inflation and increasing their reserve requirement ratio, raising interest rates. And that’s partially why you’re seeing investors fleeing from emerging markets, because of these inflation concerns.  

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