US Drought Will Lead to Inflation and Higher Food Prices

According to a recent report by HSBC, one of the UK’s leading banks, America’s worst drought in half a century will push up inflation and further impede the struggling global economy.

The report says sharp rises in the cost of wheat, corn and soya beans came when growth was slowing, but weakness of wage pressure meant there was no need for central banks to raise interest rates in response to a higher cost of living.

A hot, dry summer has destroyed 45% of the corn and 35% of the soya bean crop in the worst harvest since 1988. Russia and Ukraine have also had poor crop yields. Higher food prices will result.

This is another dampener for the global economy at a time when the headwinds are already acute. Workers are unlikely to press for higher wages to compensate for more expensive food at a time when labour markets are softening; this will allow policy makers to ignore the increase in inflation as an external shock.

According to the HSBC report, relatively high stocks of grain could be run down to meet demand until new harvests were reaped in unaffected parts of the world, but much depends on government behaviour. With memories of Haiti’s 2008 food riots and the Arab spring (where high food prices played a part) still fresh, panic buying by governments and/or export bans would only exacerbate the problem and may cause social unrest.

source: BMG