Soaring food prices threaten emerging-market currencies

While energy prices are an ongoing risk to inflation in countries around the world, several emerging-market countries face a different problem: The pace of food price inflation is rendering their currencies vulnerable.

The UN’s February World Food Price Index, released on Friday, was essentially unchanged at 20.7% y/y vs 19.2% in January, perhaps surprisingly given the rampant rally in soft commodity prices such as corn and wheat. But inflation measures in general are severely lagging indicators, and the index should soon start to reflect recent rallies in soft commodity prices.

Monday’s acceleration in energy prices poses an additional risk to food prices, given oil is a key component in fertilizers. Furthermore, food prices typically lead global headline inflation. The chart below shows that as things stand, global CPI should ease over the next three to nine months, but there are upside risks to this if energy prices remain elevated.