Food price volatility and inflation in low-income countries
Rising inflation in the context of post-pandemic economic recovery and rising food prices could worsen food insecurity in low-income countries (LICs), which has already increased due to conflict, inclement weather and pandemic-related disturbances. However, to mitigate the impact on vulnerable populations, policymakers should focus on social protection measures rather than export restrictions or price controls – which can only serve to increase global food prices. . Assistance may be needed to support the provision of such safety nets and international cooperation may be needed to maintain the resilience of the local food supply.
LICs have historically faced high inflation relative to other economies, a product of less developed monetary policy frameworks and financial systems, high exposure to commodity price volatility, and influence fiscal targets in monetary policy. However, thanks to a combination of luck and improved global and domestic monetary policy frameworks, inflation had fallen to 3.4% in 2019, well below its peak of 25% in 1994. In the environment current, although inflation is increasing, it remains well below previous highs. Nonetheless, further increases in inflation, especially when driven by higher food prices, could pose an additional threat to the world’s poorest, alongside the significant economic damage caused by the pandemic.
Rising inflation in LICs during the pandemic
While inflation in advanced economies and emerging and developing market economies (EMDEs) has fallen after the widespread implementation of movement restrictions across the world, median inflation in LICs has actually increased. from 3.9% in January 2020 to 5.6% in April 2020. Inflation during this period affected the majority of LICs and reached 5 percentage points. Much of the increase in inflation in LICs is due to rising food prices. As a result, LIC inflation for 2020 as a whole increased by 1.1 percentage points from the previous year.
New short-term upward pressure from rising food prices
In LICs, food accounts for about half of consumption baskets and 20 percent of goods imports, a larger share than in other EMDEs. As a result, changes in world agricultural commodity prices affect LIC inflation. Agricultural product prices increased rapidly in 2021 and in April 2021 were 29% higher than a year ago, the fastest price increase since 2011. The gradual and incomplete pass-through of agricultural product prices based on national food price inflation, reflecting the importance of local market conditions and costs, in addition to world prices, suggest that inflation will continue to rise in LICs by the end of the year . At the same time, in the absence of other shocks, the stabilization of agricultural prices later in 2021 and the expected weak recovery in output in LICs could allow inflation to slow down in 2022 and beyond.
Food security risks
Rising food prices and headline inflation are likely to worsen food insecurity in LICs, which increased in 2020 and 2021 due to loss of income and disruption from the pandemic, as well as ongoing or escalating conflicts and political instability. The number of people facing a food shortage crisis has increased from 135 million in 2019 to around 165 million people in 2020, according to data from the Food Security Information Network and the Global Network Against Food Crises.
High inflation, due to rising food prices, COVID-related supply disruptions, and to some extent currency depreciation, could push more people into poverty and food insecurity in LICs.
The use of export restrictions, subsidies or price controls to reduce the burden of rising food prices may seem attractive, but may further increase the upward pressure on world agricultural prices. Instead, targeted social protection measures, such as cash and food transfers, can mitigate the impacts of the pandemic on food security with less negative impacts on global food prices. LICs may face greater challenges in providing and developing income sources for these transfers, requiring technical and financial assistance. International support for improving logistics capacities and ensuring the climate resilience of the local food supply can contribute to short and long term food security in LICs.