Soaring prices for farm goods, driven in part by demand for crop-based fuels, are pushing up the price of food world-wide and unleashing a new source of inflationary pressure.
The rise in food prices is already causing distress among consumers in some parts of the world -- especially relatively poor nations like India and China. If the trend gathers momentum, it could contribute to slower global growth by forcing consumers to spend less on other items or spurring central banks to fight inflation by raising interest rates.
Politicians in markets where food costs are a particularly sensitive matter are moving to counter rising prices before they take a bigger economic toll or fuel unrest. But it remains unclear whether those policies will be enough to contain the current pressures, or whether a longer-term bout of food-price inflation -- similar in ways to the recent climb in prices for oil and other commodities -- is in the offing.
The last three months the US has seen larger than normal increases in the food components of the CPI and PPI. One of the main reasons is the change to ethanol based fuel in the US. This has greatly increased US demand for corn, which in turn has increased corn prices etc...
Here is a chart of the agricultural futures. It shows the two year increase in agricultural prices. This is another area of inflationary pressure the Fed is probably concerned about.
