Food Prices Getting Hotter

0:00Hello and welcome to GEU, the macro podcast that delivers valuable insights into the global economy. We're going to go to the head of international economics at Moody's Analytics and today we have a very big crew of people in our podcast room. That's Camille Covar and Denise Chock are resident regional experts into Europe and Asia Pacific. We also have a couple of newbies, Jimin Bang from our Asia Pacific team and any Kasa from our European team because these two are having been doing a fairb is a research into the weather phenomenon known as El Nino. We'd like to talk to you not necessarily about the weather phenomenon itself but more about the potential impacts on inflation around the world.

1:02But maybe before we do that, let's just do a quick macro and inflation roundup with Camille and Denise and Camille before we even got started recording this, you were having a row with me telling me that actually food prices have been coming down in Europe. I mean, it's a sort of thing you do, right? You just start out having a row with me so I take it in my stride but you were telling me the food price inflation has actually been coming down in Europe. I can't see that you haven't seen me for like a week so you have your knife out for me. Okay, good to know, good to know. My gender detection for you Camille. Yeah, indeed. That's my role, right? Basically, that's my role in the team so that you can pick on somebody. But yeah, you're right. Food inflation has been on quite a surprising roll coaster this year. Surprising us, maybe that was our mistake, but actually surprising everybody, including the CB because food inflation stood, you know, above two percent at this time of the year.

2:04It has been elevated values ever since 2022, right? We had a huge hill and we had come climb down but we never really settled into low inflation environment. And by 26, I think everybody kind of gave up on the hopes that we will get low food inflation or even deflation. And of course, then the 26 after the Iran war is when it happened. So during the spring, we got a string of very soft food inflation readings actually food price declines in Europe, which brought food inflation to, you know, 1.1 percent or 1.2 depending on the month. So that was the main story of this year so far, a pantheologous in September where we got a bit of a reversal, which has nothing to do with Selenino or Iran war for Iran where it's too soon for Illinois is way too soon.

3:05But it has to do with the heat waves we got in Europe during the summer, which cost, you know, a bad crop for a lot of vegetables, a vegetable prices have spike pretty significant the last two months. So pretty wild ride for the year so far. So pretty wild ride and a number of different factors, some of which have yet to materialize and show up in the data. So right now Europe's hot summer is starting to become visible you're saying and then, therefore, you're starting to see a pick up in food prices, but actually couple of the other things, particularly the events in the Middle East and the street closure, the street of one was which. Just for those that haven't been following this closely in a doubt, does anybody who listens to this show that hasn't been following this closely, we've had some issues with getting LNG out, we've had some issues with getting feed stocks that make fertilizers out from the Middle East and all of this is of course led to an increase in fertilizer prices globally. But that's yet to come. And of course, yet to come.

4:06So, that's the phenomenon of El Nino. Yeah, it's that that's always the fun part in forecasting, macro, you might get the direction right by the timing is tricky right so. We talked, I think several episodes or many episodes ago that the rising a fertilizer prices is unlikely to affect Europe significantly because for a quirk in a taxing of imports of fertilizers. Or imposing tariffs on that of sorts, European farmers have apparently stuck up before the end of the year at lower prices so. They will be actually in you know coincidentally really protected from it this year and you know that might be different next year by this year that's not going to affect as much. Yes, I remember you making that point at the start of the war in with Iran and it was really quite comforting to hear that but of course then we got into the hot European summer so we've always got to worry about these shocks and we take care of one problem, even however unexpectedly and others others materialize and actually nowadays with a lot of macro economic forecasting you'll be lucky to even get the direction right.

5:20Denise, Denise, what about Asia Pacific much more disparate inflation inflationary effects but of course we've been seeing these things feed through into inflation data. A lot of it is really around energy as far as I see it it's driving driving of sudden spikes and inflation across Asia Pacific countries but what about the food component. Yeah so energy has been pretty high the past through and quite immediate in a couple of countries but I think food prices are also starting to worry us places like Philippines where we saw inflation is inflation is the highest since 2023 and a lot of that really is food prices and this is even before you know whatever else you know phenomena is happening right this is just you know supply chain issues for the lives issues current floods and all that and. Yeah so food prices are concerning us we have the Philippines Indonesia Vietnam the one place where food price is in debt concerning is actually in China where which prices have been falling the last couple months and a lot of this is pop prices right we've spoken out this in the last few episodes and pop prices have been falling so China alone is isolated but elsewhere we do see food prices rising across the region.

6:40So maybe now is now is a good time to start talking about El Nino because we've had a little bit of a surprise to inflation this year from oil prices we've been worried about the impacts on food prices you've had lots of lots of different factors affecting food prices and quite different ways across Europe and Asia. And we generally remain concerned about inflation but of course now we're thinking ahead to the next six to nine months and what what El Nino weather phenomenon might bring and quite hard quite hard to predict is coming said would be lucky to get it directly right but we certainly quite concerned and the question really is why should we be because after all El Nino is a cyclical phenomenon occurs every few years see surface temperatures rise in in the Pacific and that voters atmospheric circulation. So we've seen changes rainfall patterns and wind systems around the world but we're used to it we've seen it happen before crop production has coped we've had you know small increases here and there we've had increases here in their in specific food prices but nothing that's led to a massive disruption so yet we we think that this year potential to be somewhat different or does it so it's a gym in what are you worried about why do you have any height and concerns around the impact of food of El Nino and the food prices.

7:58Food price inflation across Asia Pacific. Yeah so this El Nino coming El Nino is definitely a heightened concern compared with the previous El Nino although it's a cyclical phenomenon because how certain the forecast is pointing on regarding a strength. So the world meteorological organization puts the likelihood of El Nino around 100% through this December up to like early next year and this is the first time like the update has been this unequal vocal. And the biggest difference is it's faster this like one of the fastest speed of heating on the seas levels of temperature and it's a compounded impact so we already have the supply chain issues that's ongoing but on top of that this El Nino is supposed to hit food inflation which is causing more worries and there are already preemptive responses from the central banks ahead of the actual inflation impact kicking in.

8:59And just to give a brief description of some background information how on how strong this El Nino is going to be the last El Nino that took place in 2023 to 2024 was considered to be moderate under the relative of shenaninio index which is between one one per one degree Celsius 1.5 degrees Celsius but the upcoming El Nino is expected to be greater than two degrees Celsius. I can I just jump in there and I'm hearing you say that this El Nino is going to be quite quite significant but maybe you could talk me through some of the potential impacts and crops and economies because we're looking at a bunch of countries that border the Pacific I we we know that this is a phenomenon starts in the Pacific we also know that it affects rainfall patterns. What are you worried about which kind of crops say you worried about which kind of countries are you worried about. Yeah so the biggest crop that I worried about is definitely rice within the APEC region because rice is a staple in this economy and the dryness cuts into the yield of the rice and it also impacts next year's production because if you delay the plantation now the production is going to be delay next year.

10:13So the hit is actually spanning across two production cycles and the elevated drought risk into next year just makes it more intensified so roughly a 12 month lag and production is going is expected at the moment and. But the important thing we need to know is that the price actually moves before the actual shortage kicks in. So when we anticipate a shortage in production coming in prices will actually start to move faster and we've seen this in the last El Nino cycle as well when before the actual shortage kicked in right prices moved at least six to. At least a few weeks before this when export bands and everything kicked in so yeah and not only like food we also expect other commodities such as palm oil to be impacted as well which Indonesia Malaysia are like the two biggest producers in the world and regarding palm oil production typically takes around a year to actually have this full impact so we expect the main supply hit to come in 2027 not immediately from and.

11:19So we're going to have a lot of this year. Great points because you also bring out other issues supply chain issues such as countries prioritizing domestic production putting an export bands and all of these can exacerbate the problem and Denise remind me again we've actually seen Indonesia do some of this kind of stuff this year already. There was a palm oil export ban I think earlier this year but not that was more related to the all price right to not food related but I think more related to this was India had a rice export ban the last time this happened so that really affected the region right because a lot of our rice does come from India and so I think that's something that we are watching over. Yeah exactly so I think that these these associated issues it's not just the direct impact of the weather phenomenon on food supply or shortages but actually what countries do in order to mitigate these problems that could have a even bigger global impact. Danny let me turn this across to you food is not that important a component in in the inflation basket in Europe as it is in in many Asian countries maybe even half of that some of these Asian countries and Europe is quite sheltered in terms of the linear effect itself and in terms of sourcing its food do you have similar concerns for for your.

12:35Europe well if you were looking at history looking at previous events and say 97 98 2015 16 for the most recent one a few years ago in 23 24 you'd be forgiven for shrugging if you're European it's not historically an important event for European food prices and the reason for that is the key staple is wheat and as you say it's a lower share food is a lower share of the CPI basket in European countries. And the supply chain for food or agile and flexible obviously the import some soft commodities cocoa coffee sugar rice palm oil which are exposed to the new effects because the growing areas are in these especially exposed areas but Europe itself is one of the most geographically protected regions in the world in terms of direct weather effects and food supply is has historically not been affected. But the situation over the next 12 months is different right because the context is different.

13:40The as Demen mentioned that the timing for maninho is lagged so historically it would be a year after the immediate effect you feel the primary part of food inflation so we will list prices globally into 2027. But the context in Europe is that there are these other effects that Camel touched on which are hitting food inflation now and into the middle of 2027 as well. So you have for example disruption to the straighter for moons which is driven up falsely first advisers gas and diesel all of which feed through into food prices at different time lots. And then you also have disruption in the black sea grain exports through the black sea have been highly impacted by the escalating geopolitical situation between Ukraine and Russia there the nature of the warfare there has changed to target shipping and food exports and the ports and infrastructure that supports those exports.

14:40And of course you have already the effect of this exceptionally dry summer if you recall I recall reading headlines during the summer that the Danube was at record low levels right and as you can imagine that's not a great time for farmers in Europe if you can do that to one of the biggest waterways obviously will hurt the yields and of a farmer and it will hurt output so a food so that context then. And then it is negative to begin with and then Jimi raised what I think is a very important point which is that you know protectionism is now a normal policy lever in peace type export bands even without all the food security concerns of El Nino are emerging throughout the world it's a normal policy response and there is a risk here that the the export controls and export bands grow in response to an especially strong El Nino as countries prioritize their security and.

15:40And Europe that historical ability to switch supply chains in an agile way is a rooted that source of the policy buffer is no longer what it used to be so all else equal we should see a range if I imagine several dominoes falling together with El Nino hurting at the margin and compounding an already bad situation by itself no big deal for Europe but as part of. A sustained rising prices and many shocks one after the other it could be the straw that breaks the camel's back or at least makes a kind of very uncomfortable. Taking taking a step back and thinking about all these different points that both of you have raised feels to me that it's much more important directly much greater direct consequence to separation economies much less important to Europe and. But both of you have raised some interesting points which is basically the backdrop the global economic backdrop matters and in some sense that could be a compounding compounding factor to all of this I was actually thinking about that global economic backdrop and I want to bring come in on this because.

16:52When Russia Ukraine happened of course even though Europe is such a secure food area nonetheless it hurt Europe for food prices but that's of course very much a geopolitical event centered on Europe. Do you think the same round it will be different that the Denys right even though there are. There's a concern around a weather event it's really at the margins for Europe because European food supplies doing reasonably well Europe supply chains are pretty secure or not. Yes we do think that this is going to be different right because also I think 2022 last time this happened it was there are two ways in was different right the shugs this time around. Are significantly smaller if you look at the prices of various commodities from gas to fertilizers to most of the foodstuff the charts yet they have a bit of a hill now but compared to the hill we saw in 2022 it's very different and also 2022 was like a generalized inflation moment right.

17:56The macro economic conditions for inflation first were much more present so both of these factors to me feel that this should be better or much better back then back then but of course and then it's kind of a looting today is. As the progress in 26 it is looking like 22 more and more rather than less and that's that was me a bit right it's. Our view of how things the 20 how 2026 will evolve how fear ago where much more sanguine in terms of the inflation then how they are evolving right now so so in that sense you know you get a heat wave you get the. Strong El Niño right then Iran were started we didn't talk about the right it just feels like it's piling on and we know that the inflation like dynamics are highly no linear right if you get.

18:58The twice as big shock you get more than twice as big in Python on price so in that way it's starting to look. Big worrying but still far from 22. What I love about chatting with you come here is that every time we talk we start out disagreeing with each other and having a bit of a row but as the progress conversation progresses we actually find. We can complete agreement with each other so right now I found myself shaking my head and violent agreement with you when you said that. As time wears on this is starting to feel a bit more and more like 2022 and I'm I'm I'm also getting quite worried it feels like. We might be at risk of being caught in a complacency trap simply because the shock isn't as proximate because it's not as high because it's not as. Hasn't hasn't spread out across the system so rapidly we're sitting here thinking actually knows not that bad. But time is wearing on the club song taking we never find a resolution to all of this other is keep arising and compounding the problem and it is it is indeed starting to feel more and more like 22 and I'm getting I'm getting quite concerned so even though I hear what Danny saying that this is quite far away from Europe is quite protected El Nino is quite a something is happening quite far away in Europe should be okay I would argue against complacency.

20:15I'm sure policy makers also not that complacent but maybe let's go back to Asia right now to think about the policy response. Jimin what what do you think central banks. Good to do and or even fiscal authorities could do and actually maybe let's start even with what's happening right now because central banks and. And fiscal authorities have been taking steps toward off the negative impacts of the energy shock and the current increase in food prices so what's going on. Yeah so to start off with what's going on in the region. The central banks are actually turning more hawkish some and central banks already commenced their rate hikes as such as central bank of Philippines and in bank Indonesia. And if other central banks that they have not hiked their tone from their meeting minutes have turned quite hawkish at the moment. Yeah so uh bank also and the whole Filipinas Philippines central bank is like the most explicit central bank does acting on it at the moment it in their August meeting they raised a policy rate by 25 basis points from 4.75 to 5% which is like their third consecutive hike and they directly cited.

21:33Oil prices and possible severe Elmenio at so it requires a preemptive monetary action. Yeah and bank Indonesia also similarly in August although they did not raise rates in August and September they also directly stated Elmenio as an upcoming concern so if necessary severe Elmenio kicks in and. There is a materialistic impact on inflation that they will keep the doors open for potential rate hikes in the future as well. Yeah I guess it's not a good time to be a central bank like this technically is supposed to look through supply shocks and that's what we thought central banks would do at the start of the so conflict already all shock supply shock this was looked through it. Same to El Nino this is a supply shock you're supposed to look through it but I think for Asia the effects concern is quite prevalent right you see a lot central banks hiking just because the local currency has been shooting and it obviously hurts the if that obviously affects your important inflation.

22:35I think this very interesting what the point of the GM is raised here and that's few of the central banks in Asia Pacific have explicitly named El Nino already. We started out this conversation saying with the impact of El Nino is yet to be felt and it will be you know sometime into next year before we see that materialized but it's quite clear and also to your point Denise that with all these supply shocks arriving central banks clearly getting quite nervous about it and I'm but I'm also reading into the. This is the countries that are likely to feel it the most these also the countries that are most worried right now and they're actually starting to make the point about El Nino already beyond these three countries however do you see other countries also likely to get concerned about the direct impact of El Nino and food production in their country or do you think other countries will be more concerned about the indirect consequences such as say India putting in an export ban on rice affecting other countries so that that sort of thing. Yeah so other than these although we haven't seen any action yet a bank of Thailand also has written in their August statement that they expect headline inflation to rise throughout next year first quarter reflecting El Nino related impacts and a gradual cost pass through so other than these countries mentioned definitely their other central banks that are worried about the upcoming impact as well but as you mentioned.

23:59And other secondary impact from like potential export ban from India is definitely worth a watch because that's what exactly caused the biggest distortion and inflation in the last El Nino cycle so just to give a brief. It's like summary of what happened is that the Indian export right a ban on non basmati rice caused a shock in the global rice markets causing Thailand and Vietnam and other like rice price exports to sky sky rocket and had a spill over impact on other countries that depends on rice imports such as the lipines so roughly the impact on headline inflation after the export ban was seen from like. Half a year later after the initial price spike so although we don't expect an export ban at the moment because India's rice production for a cost for this year and next year are fairly stable and they have. A lot of rice stock around 73.9 million tons as of the first quarter which is more than five times of the government's peak stock norms so we don't expect any export ban to happen now because there's enough stock in the domestic market.

25:12But then again if any export ban kicks in and the what happened in the previous El Nino cycle is a repeat it will it's going to cost more like it's going to be more severe when we already have ongoing supply chain issues that's quite impacting on the headline inflation already like negative impacts and we also have another negative impact just compounding which is going to make policy response quite complicated for these central banks. We've talked quite a lot about impact on food prices but we haven't yet touched upon the possibility of more extreme weather events now we are seeing some fairly big wildfires in Indonesia and. He's spilling across to Asian economies I guess we might also be concerned about things like water scarcity again I it feels to me very much an Asia Pacific story not not not really relevant that relevance to to Europe even though Europe has also had its wildfire season but coming back to you Jim in. Are you worried about the potential for a linear to create further extreme weather events.

26:15Yeah so as you mentioned both water scarcity and. He's and other health issue are definitely both a concern but just starting off with the waters guest to put so instead of school like we already have like high oil natural gas prices pushing electricity prices higher but the water scarcity issues tempers on low reservoir levels which will constrain hydropower generation like the country that rely most on hydropower generation are laws and Vietnam so there will be the more like most exposed regarding lower water levels impacting electricity. So when it when law and also low reservoir levels impact drinking water levels in the region as well so there are two impacts that we can already see and because El Nino brings hotter temperatures in the region general people will want to use more like there's a higher demand for cooling such as more air conditioning more fans so you have higher electricity demand here but there's like a lower supply because water supplies limited.

27:24High less hydropower generation and as mentioned the ongoing status cool so there's a squeeze and electricity for both supply and demand which will going to increase and higher electricity prices in general. And another thing is Thailand is also exposed here although they're not mostly reliant on hydro power generation but it's because they import a lot of like the import electricity from laws which is dependent on hydropower generation so you can see it's going to have somewhat of a chain effect here. Let me let me turn this over to to Danny now and consider some of the macro potential macro impacts in Europe what do you think's going to happen Danny do we way we've talked about it it feels like the lots of other factors that Europe needs to be what it about particularly when thinking about food price inflation so is that right do you think that El Nino itself its direct consequences might be limited but it's more sort of indirect effects through which food prices might take another hit. Yeah absolutely I think this El Nino will really be different than others for Europe because of when it is arriving in the context in which it is arriving to European tables ultimately I see the context as pointing towards 12 months of inflationary dominoes falling at different times and feeding into next year not one big shock.

28:47Nevertheless the all else equal a sustained rise in prices from multiple sources should put up upward pressure on central banks to keep rates elevated and prevent broadening out of inflation air pressure from energy into food and creating the kind of 2022 environment that Camel just to finish describing a moment ago and at the same time that's all else equal although almost certainly not be equal. A lot can change between now and the end of next year the key factor is energy and easing or a fall in the situation there could drive energy prices down and overwhelm and then you're in isolation so this is something that I would watch at the margin and expect. It to be an inflationary headwind for Europe much more than in the past because the situation is different but a lot can change from many different direction for Europe. At the same time I think there is also a risk of fiscal measures to contain food prices in a way that we've seen with fuel prices in some parts of Europe and that could compound existing fiscal risk in some European economies.

30:03There will also be some type of commodities that will be more exposed so cocoa and sugar for example have may adjust in the past coffee has been a risk so bad news for your chocolate bars which I certainly enjoy having. I've been hearing about the impact on soft commodities the potential impact on soft commodities but hopefully just remains contained at that. Maybe we should just wrap up a bit now and take the broad view of growth and inflation. Camel you've been worried about inflation continuing to creep up that going back to that point you made that this could be sort of. A rerun of twenty twenty two in some ways along with the squares on. We haven't had the time to really think deeply about El Nino so this is really it we kind of real life forecasting right now thinking about El Nino thinking about what that might mean for. Twenty twenty seven inflation what that might do to monetary policy what do you think.

31:06Well speak for yourself I have been thinking about El Nino for several months i'm glad somebody has i'm glad somebody has I take it all back you've been thinking about it well tell us your thoughts well. You know at this point we are going by a reasonable rule of times we have you know research from from the European central bank. Showing that historically speaking El Nino's increase the farm gate prices in in Europe by something like 10%. So we are counting the roughly is that maybe slightly bigger increase than that. And then we would when we run that through our models because of course the pass through from farm gate prices to consumer prices is a slow and not particularly large right so we run this through our models to see. Where we think the consumer inflation food inflation is going and roughly speaking where we land is right now we are what said around 1.5 we think that the by the end of next year.

32:14We will be two percentage points or slightly more than two percentage points higher so approaching 4% probably not getting there all the way to 4% but definitely a sizable increase and now you think about it the weight of food prices in the overall basket is something like 1.5. This alone is going to mean an increase adding adding something like you know 40 basis points to inflation by the end of next year relative to where we are now. And Denise your job is much harder because you don't have the luxury of combining inflation across Asia Pacific into one single time series but where do you see the incidence of inflation being the most worrying. Yeah I'm actually quite afraid to make a call right part of this is I since start a year I we don't really know what is going to happen like so many things has happened that have overturned a lot of the assumptions that we've been holding. But I mean just broadly I think it's safe to say that we do see inflation picking up higher but the way to think about this is that there's also a lot of government policies in play right much like the oil shop there's also rice stores to consider here.

33:27So rice stores do help to buffer any shop to rice prices. So we are thinking about it I think just broadly again inflation picking up and the areas most affected are those that are already seeing food prices high now so you do see the Philippines Indonesia, Taiwan being affected as well. Yeah I tend to think that I'm afraid to say. No that's okay I understand I understand the uncertainty here but I tend to think of Asia in sort of three geographical groups with this kind of a problem you've got Southeast Asia East Asia and South Asia and from everything Jim insert it feels like Southeast Asia is the most directly is the region that's most directly affected by all of this. These also countries with less buffers many of these countries have less buffers and so they might be actually in being more of a vulnerable position East Asia. I'd I tend to think that if it's going to get affected is going to get affected through the secondary impacts to things like export restrictions but these also countries with more buffers and greater ability to deal with it and then South Asia could be directly impacted very much directly impacted.

34:37And then there's a bit of a difference in depending on the country you look at in terms of buffers so India might have the capacity to put in export restrictions and sort of help protect domestic consumers some of the other countries less so and they will definitely have far less buffers and say Southeast Asia these are actually quite vulnerable countries already in in in difficulties many of them in difficulty so I tend to think of countries in these three groups and I don't know if you agree with that. Yeah, that's really nice way to think about it because I was trying to do Asia as a whole I would you we know it's always hard to get a nice way to get a rise it. Very good well thank you Jim and then if you're joining us and sharing your research on on El Nino and the potential impact on food inflation and monetary policy thank you especially to come up for having thought about El Nino for several months already and decided what to do and he's got a clear path forward for his inflation forecast and we're going to be able to do that. So I'm going to be able to do that for the inflation forecast and his monetary policy forecast and thank you Denise for for packaging it all up and taking that high level view of Asia and of course thank you to our listeners for tuning into yet another episode of the global economy and rat.

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