Agflation in the Global Economy

The persistent rise in world agricultural prices, which is a major contributing factor in inflation, is known as Agflation.

The period 1974-2005 witnessed a continual fall in agricultural prices. World food prices have risen by 75%. Agricultural production is subject to the vagaries of nature and hence is highly fluctuating. Agricultural prices follow suit where over production may lead to a drop in the prices and the vice versa is true.

Factors Behind Agflation

The last three decades have witnessed a downward trend in the agricultural prices. It is important to study the factors that triggered the reverse trend.

Structural changes within an economy are an important reason behind Agflation. There is a rise in per capita income in the populated countries like India and China. Consumption of food grains as feedstock has also increased. Previously, with the fall in the grain prices, many farmers had shifted their production lines to more profitable ones. The present rise in the demand could not match the supply side, which has triggered price. According to the International Grain Council, the world grain production would reach 1660m tones in 2008, which exceeds the previous year by 90m tones. Even then demand is likely to outdo supply.

With the rise in the grain price, the price of all the food items that use grain as an input would rise. With the rise in the cost of maintaining poultry, the cost of egg or chicken also rises.

Another important factor causing Agflation is the rise in the price of oil. Due to this other alternative energy resources are ventured forth like bio fuels. Ethanol is on the cards that use sugarcane and corn. This in turn has led to the rise in the demand for corn and sugarcane. In comparison to the year 2000, corn about three times more in volume is required to produce ethanol in America. Since the production of corn and sugarcane is profitable, farmers have shifted their production lines from grain. This again has increased the price of food grains. Although technological changes can take care of the supply bottlenecks, it is a lagged process.

Agflation As A Global Problem

Inflation in the agricultural sector can be attributed mostly to crops like coffee, corn, wheat, and soybeans, sugar, cocoa and meat and poultry products. The 7.1% inflation rate in China is due to the rising food prices. There are idiosyncratic factors such as consumption baskets, monetary policies etc may dampen or fuel Agflation.

The phenomenon of Agflation poses a serious threat for developing economies rather than the developed ones. This is because food carries 14% weightage in the Consumer Price Index of America. The figure is 33% and 46% in the case of China and India respectively. For the poor countries an increase in the food prices would have greater contribution on inflation rather than the rich ones.