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Bernanke denies that US Fed are causing food inflation

February 4, 2011 Leave a comment

US Fed chairman Ben Bernanke has indicated that the US Fed is not responsible for increases in world food prices. Critics have argued that by driving down US interest rates with quantitative easing the Fed is pushing capital flows into commodities and emerging markets. He said that there are two reasons for higher foods prices in emerging markets:

1. There has been a growth in wealth in these countries and
2. A failure to tackle inflation.

To address the latter they have been reluctant to use a contractionary monetary policy (higher interest rates) and they can also adjust their exchange rate which some countries have been reluctant to do. Surging food prices have helped fuel protests that toppled Tunisia’s president in January. Food inflation has also been among the root causes of protests in Egypt and Jordan, raising speculation other nations in the region would hoard grain stocks to reassure their populations.

The United Nations Food and Agriculture Organization (UN FAO) measures food prices from an index made up of a basket of key commodities such as wheat, milk, oil and sugar, and is widely watched by economists and politicians around the world as the first indicator of whether prices will end up higher on shop shelves. The index hit averaged 230.7 points in January, up from 223.1 points in December and 206 in November. The index highlights how food prices, which throughout most of the last two decades have been stable, have taken off in alarming fashion in the last three years. In 2000 the index stood at 90 and did not break through 100 until 2004.

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