Agflation is back, and so are unhelpful fixes.
Under pressure from falling incomes and higher inflation, Moscow has rushed to cap the cost of basic foods and introduced measures to curb wheat and other exports. President Vladimir Putin’s televised displeasure was a symptom of the strain governments are feeling everywhere. Fortunately, the problem is not yet at levels seen just over a decade ago. Unfortunately, Russian-style restrictions are the only solution guaranteed to make a food crisis worse.
From adverse weather to governments raising barriers, there’s plenty compounding the impact of Covid-19 disruptions and helping bring a decade or so of cooler food inflation to an end, even if stockpiles are not yet looking too sparse. In China, demand for feed to cater to expanding hog herds and the processing industry has driven corn and food soybean futures to record levels. Globally, the Food and Agriculture Organization’s gauge of food prices for December reached a six-year high.
Russia is among those at the sharp end, thanks to lackluster oil, plus rising unemployment and frugal Covid-19 support that has left households strained. Now, food is pushing up overall inflation and it’s threatening to hold back a torpid recovery — bad news for Moscow, with a legislative election due later in the year and the pro-Kremlin United Russia party already lagging in the polls. Optimism about the economy has dropped to 1998 levels, and a third of Russians now consider themselves poor.
Putin, who portrays himself as a man of action, has to be seen — predictably — acting. So it’s not hard to understand his impatient comments to officials and in his annual press conference on the jump in sugar, sunflower oil and even pasta prices, accusing producers of targeting overseas markets at the expense of domestic consumers.
The result is that the world’s top exporter will impose a levy on wheat from mid-February, alongside other grain export quotas, and will support flour producers with subsidies. Russia’s prime minister has sought to limit the price of “socially important products” like sugar and sunflower oil. Squeezed, supermarkets have dropped mark-ups.
Not much of this is unique to Russia. In Brazil, inflation as felt by the country’s lowest earners hit the highest level in eight years in 2020 thanks to a spike in food, on which less affluent households tend to spend a larger proportion of their income. Beef, a staple, rose by over a fifth last year, while rice also surged.
But it is worrying to see barriers beginning to look like a trend, as nations fret over disruptions ahead. Argentina has reversed an earlier corn export suspension, but will still limit daily shipments through February, hoping to keep a lid on basics in a country where inflation is forecast to reach 50% in 2021.
It’s clear why governments want to step in. Rising costs make it harder for many emerging economies to get moving again, especially those hit by unimpressive crude prices and hefty food purchases from overseas. They are also all aware of the risk of simply letting the problem run: Back in 2007-8, the spike in wheat, rice and cooking oil fueled protests and unrest.
Most straightforwardly, officials intervene because they can, and because gratification is swift. Russia in particular is relatively self-sufficient, as a result of sanctions imposed after the 2014 annexation of Crimea. That means, as Aurelia Britsch of Fitch Solutions points out, that Moscow could yet tighten curbs further. And the temptation is growing for others to follow — at least until prices ease, as expected, later in the year.
Just because you can, though, doesn’t mean you should. Hoarding doesn’t work for the global economy any better than it works for shoppers grabbing toilet paper. Such measures can rapidly proliferate, as they did over a decade ago, exacerbating the problem. Then, uncooperative trade policies are estimated to have accounted for 45% of the increase in the world price in rice, and 30% of the hike in wheat. A temporary Russian tax alone may not upend the market, but a wider move certainly would.
Intervention also muddles market signals at home, as central bank governor Elvira Nabiullina said last month, and rarely promotes the best use of resources, even if government measures can tame the problem in the short term. In the home loan market, for example, subsidies are already fueling a worrying surge in mortgages. Less damaging, longer-term solutions for nervous leaders include improving domestic supply chains and transport, and perhaps building buffer stocks for next time. Climate change, after all, will only make spikes more frequent.
For Russian officials and others, efforts now would be better channeled into wider support for households, and into policies to curb the long-term impact of the malnutrition that comes when food basics become too expensive. At least we know the benefits of a healthy diet tend to last.
Bloomberg
