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Rising global food prices a low inflation risk, says HSBC

Cost of staples still steady, even as FAO index hits highest level since last May
Tuesday, April 22, 2014 - 06:00

[SINGAPORE] Rising food prices might make headlines, but the risk to inflation is still low, according to HSBC.

The cost of staples has remained steady, and global growth is not strong enough to turn higher prices for finer foods into a "full-blown inflation problem", it added.

The food price index tracked by the United Nations food agency rose 2.3 per cent or 4.8 points to 212.8 points last month, the highest level since May last year.

This stemmed from unfavourable weather conditions in the US and Brazil, as well as geopolitical tensions in the Black Sea region, said the Food and Agriculture Organization.

On top of that, a virus in the US has killed millions of baby pigs, pushing up pork prices by at least 10 per cent.

Milk prices have also hit record highs as demand for dairy products in countries from Mexico to China surged.

Noting that food prices are near the highs reached in 2008, HSBC economists Frederic Neumann and Joseph Incalcaterra said that they would need to climb "sharply higher" to drive up consumer price indices (CPI) again.

The relative stability in prices for staples as compared to "finer foods" such as milk and pork is also helping to anchor broader food price inflation, they added.

"So don't fret about inflation for the time being. There is nothing sinister going on in terms of food prices in Asia," they wrote in a research note on Thursday.

In addition, price pressures have eased in most Asian markets. Food inflation has largely slowed, except in the Philippines, Taiwan, Malaysia and Singapore. But where the CPI is more sensitive to swings in the cost of food, such as India, Indonesia, Vietnam and China, price pressures have dropped, the economists added.

HSBC is also expecting prices for certain agricultural commodities to reach a higher plateau, reflecting structural changes in global supply and demand.

Separate research by the bank found that consumption of grains is the first to pick up as a developing country becomes richer, but as it reaches middle-income levels, demand shifts to meat, dairy products, sugar and edible oils instead.

With many countries having exceeded low levels of per capita gross domestic product (GDP), human consumption of grains may have already peaked, the bank said in a report last month.

There is, however, more room for higher consumption of "finer foods".

Demand for these tend to grow until per capita GDP reaches US$20,000 to US$30,000, it said.

"As per capita GDP in many countries is still below these levels, demand for finer foods is set to rise for many years yet."

As a growing middle class boosts demand for these, HSBC reckons that soft commodity prices might even outperform hard commodities - the main beneficiaries from the industrialisation of emerging economies so far - in coming years.