Blog: Dean BestAgflation - the new story

Dean Best | 13 August 2007

Agflation. It may not be a word you are all yet familiar with. But, rest assured, over the coming months it will be. It is the term being adopted by economists to described the rising costs of food products, such as cereals, dairy and other basic groceries.

The rising costs of food across the globe is not yet front-page news in most countries, but it's our belief here at just-food that it is steadily moving up the agenda.

Those who have been concentrating hard on just-food's news pages in the last month will have noticed the growing number of food producers showing concern over mounting raw material costs - Dean Foods, Cadbury Schweppes and Barry Callebaut to name a few. The moment when these costs are seriously passed onto the consumer will be the moment that this phenomena will take centre stage in the consumer press.

Despite its rising importance when describing the current outlook for the global food industry, agflation remains a worryingly woolly term and its causes shrouded in confusion.

One newspaper report I read blamed the supermarket sector for the concept in their pursuit for greater profits. No doubt increasing demands on global food supplies by the likes of India and China will get their fair share of coverage, as will the freakish weather we have experienced over the last quarter.

The auto industry is also copping flak with moves to replace a dependence on petroleum and diesel to run cars with biofuels - petrol made from corn to the likes of you and me.

But as ever when looking at the complex way the global economy interlinks, the picture is more complicated than that and economists are even at odds as to whether agflation is a cause or symptom of global inflation.

"But to say that rising food prices produce an inflationary (or, I suppose, an 'agflationary') effect is to say that inflation is, itself, an occurrence of rising prices. While modern use of the term "inflation" has been corrupted to reflect this meaning, it is incorrect in light of its classical definition, an increase in the supply of money and credit," one financial blog commented earlier this year.

What is certain is that the concept is one we will all have to get used to dealing with, whether as consumers or traders.

The US producer price index for raw food and feedstuffs was up 19% or more year-over-year from February to June - topping 30% in May for the first time since 1974. And this month, the Economist Intelligence Unit forecast the price of grains and oilseeds will rise 16% and 29%, respectively, this year.

As one analyst I read this week said: "Costs will rise across the economy, and 20 years of disinflation are coming to an end, worldwide. The new story is food."


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