The Changing Drivers of Food Inflation – Macroeconomics, Inflation, and War

The inflation surge in recent years is having profound social, economic, and political consequences. With food price changes being an integral part of inflation, low income segments of the population are strongly impacted. What makes this period so unusual is the breadth of price pressures that are affecting both low and high-income countries. In essence, this phenomenon shows that inflation is increasingly synchronised across borders. This study examines price developments across countries and over time and investigates the driving factors behind food price hikes. Our analysis reveals that a complex mix of causes has led to the soaring food prices seen in 2021-2022. The spread of COVID-19 produced disruptions in the world’s supply chains, pushing the cost of producing and transporting food upward. The increase in fertilizer and energy prices has further exacerbated production costs for agricultural products. Adverse climatic phenomena (e.g., La Niña), generated droughts in parts of Africa, Asia, and the Americas, damaged harvests, and fuelled inflation. The war in Ukraine and the associated trade blockade of grain exports made things worse. Additional pressures included speculative activities in financial markets, which were already at play before the Russia-Ukraine war. In spite of all these increases in costs, inflation could perhaps have been kept under control by immediate, sufficiently restrictive monetary policies by Central Banks. Most likely, the main cause of the strong inflationary surge in several countries seems to have been the failure of some Central Banks to rapidly intervene to counteract the effects of overall price increases including key staples. Soaring inflation is continuing to make vulnerable countries hungrier and poorer and, therefore, prompt actions are necessary to help them.