Grocery baskets may have been fuller in 2011 than in 2010, but how long will that last? Food inflation is moderating slightly in China, India, and most other Asian nations, in part due to larger food crops in Asia--but this moderation is nothing huge, and we do not expect it is permanent.
It can be misleading to only look at year-over-year inflation statistics, since they don't always capture the larger trends. For an example, we will use a fictitious country. Let's call it Chindia. In Chindia, the inflation rates went up 10 percent in 2010 and 5 percent in 2011. Government officials in Chindia will measure this as a moderating rate of inflation. This decline in the inflation rate will allow for a decline in interest rates. However, the reality is that despite the fall in the rate of inflation, the goods being sold on January 1, 2012 are still 15.5 percent higher than they were on January 1, 2010. Chindians may feel a little relief, but they will know that prices are still rising.
Reason for the Slowdown
The slowing growth in the developed world and the tighter monetary policies in the emerging world were two reasons why 2011 saw a slowdown in inflation rates. Another reason was general fear about Europe, which slowed bank lending and corporate expansion.
Brazil started cutting rates in late 2011...reducing their SELIC rate
China also began loosening...reducing their high banking Required Reserve Ratio(RRR)...we expect more of this in coming weeks and months
Causes of the Inflation
If you have read our past commentaries, you'll remember us saying previously that the food inflation was caused by the expansion of wealth among citizens in many countries--China, Brazil, Thailand, Indonesia, Philippines, Malaysia, Chile and India to name a few--over the last few decades. As the poor of these countries have grown wealthier, they have desired food in larger quantity and variety. The first wave of demand was for more grains, and secondly, more meat protein--which, in turn, increased demand for feed grain--because animal protein has higher grain and water requirements than other sources of protein. The general rule states that every pound of chicken requires four pounds of grain; a pound of pork, six pounds of grain; and beef, eight pounds of grain. Therefore, countries shifting from a vegetarian-based diet to an animal-protein-based diet must feed animals between four and eight pounds of feed grain to produce every pound of animal prote in. Clearly, as more animal protein is demanded, more consumption of grains is necessary.
Now that food inflation is moderating, has the food inflation problem been solved? The answer: partially. The problem has been addressed in part by: 1) Increasing the acreage of land under cultivation. Many countries are preparing for their citizens' demand for a diet higher in animal protein. They are planning to grow more food and raise more animals. 2) When a country allows its currency to rise the higher currency acts to lower the cost of imported grains and meat. For example, the Chinese currency, the Yuan, has risen by 8 percent against the U.S. dollar and 22 percent against the Euro since the January 1, 2010. The rise in the value of the Yuan reduces the cost of imported food in Yuan terms. 3) Countries have started to address their water needs and are investing in and developing more water resources.
How Long Will Inflation Continue To Moderate?
That is a very good question, and we do not know the answer. We will discover the answer by monitoring world political, social, and economic events. We expect to identify signs as they appear...before the return of rising inflation. Inflation in Asia is moderating now, and it is not vigorous as it was in other parts of the world.
History tells us that all of the 'money printing' that has been going on in many countries will cause the buying power of currencies to decline. Decline in buying power of money is inflation. The shopping cart of food costs more dollars as the buying power of the dollar falls. We will have our antenna out and we are monitoring inflation events carefully. You can count on us to report to you.
