Stagflation warning as food prices keep rising
Though good for farmers, increased demand for a wide variety of goods is driving commodity prices through the roof.
This is reflected in continually rising prices for a variety of dairy produce and grains vital to both ends of the food chain.
That phenomenon is starting to impact on inflation and is raising fears that we are looking at more costly goods and services in the years ahead.
To add to that we may also have to live with higher interest rates as banks worldwide grapple with rising food and other costs.
Add to that the soaring cost of oil and it becomes clear the global pricing landscape is beginning to look a lot more menacing.
Without doubt the quest for higher living standards and falling oil stocks means the global economy is entering a new phase of higher prices, higher interest rates or both as central banks battle to keep the rising prices phenomenon under control.
The former head of the US Federal Reserve, Alan Greenspan, warned this week that the era of unprecedented “disinflation” of the past 20 years will end.
It had evolved as the Cold War ended. It was helped by bankers who acted globally to keep inflation in check while the freer trading and financial environment helped to increase competition that pushed prices lower across a range of goods.
Now, as living standards rise across Asia and goods from China start to rise in price, the low-cost environment enjoyed over the past two decades is changing.
In other words we can no longer export our inflation to poorer countries because they finally are demanding the living standards we have enjoyed in the west.
As a result inflation is starting to emerge as a serious concern.
Euro inflation is at a six-year high while in the US the rate of 4.8% for November caused serious alarm about the future for that nation’s economy.
In his weekend comments Greenspan warned the US could at present be showing the first signs of stagflation.
That is a phenomenon where inflation continues to rise while the economy slows.
It is a nightmare economic situation and if it becomes a reality the implications will be pretty grim.
In 1979, when the US was in the grip of stagflation, the Fed clamped down hard on the money supply when it refused to provide the funding required by an inflation-ravaged economy, which caused interest rates to rise.
The net result was that consumer spending and business borrowing slowed abruptly and the US economy fell into deep recession.
While that scenario is some way off Greenspan warned the world needed to alert itself to the fact that the global environment is moving to a less user-friendly path.
For us in Europe who have benefited from the good fortune referred to by Greenspan over the past two decades, the environment is changing before our eyes.
At its inception the EU, after the last significant conflagration in Europe, identified security of supply as a core principle.
It constructed the elaborate Common Agricultural Policy to keep farmers on the land producing adequate food to meet the needs of its population.
That system is now being unwound as the EU moves to freer markets.
But as it does the great irony is that the cost of what we eat and the price we pay for our fuel may be about to make life a lot less pleasant.
If that phenomenon persists the enlarged EU may find itself having to perform a sharp reversal of current policy to ensure that we will be able to afford to eat.
