Pandemic-Era Inflation, Fossilflation and Climateflation

The new age of inflation and its impact on food security

Multi-Decade High Inflation

The global economy is hardly a stranger to inflation, having experienced historical periods of accelerating prices driven by wars (World War I and II, Korean War), pandemics (Spanish Flu) and oil shocks (1970s oil shock). The Consumer Price Index (CPI) – a measure of the average change in prices over time in a fixed market basket of goods and services – reportedly hit its highest level in January (2022), with US prices increasing by 7.5 percent from the previous year. More recently, US inflation climbed to 7.9 percent in February and in March, to a new four-decade high of 8.5 percent (WSJ 2022). Gwynn Guilford from The Wall Street Journal went on to describe the price increases as unrelenting and well above the Federal Reserve’s average 2 percent target. Similar historical parallels such as pandemics and oil shocks exist that could inform policymakers on the best course of action to take. However, the magnitude of the COVID-19 pandemic, the energy crisis and now climate change, implies that history might not be the best guide here. Given the unprecedented nature of rising food prices, aggregate inflation is likely to aggravate food insecurity, which is defined as a lack of consistent access to sufficient quantities of affordable, nutritious food. This could have a devastating impact on vulnerable households who spend a higher percentage of their income on goods and services. Such households face the threat of being pushed into poverty and hunger. As a result, governments and policymakers will need to play a major role in fighting this wave of inflation along with the confluence of interconnected crises, all at once.

United States Inflation Rate

Pandemic-Era Inflation

Inflation in the wake of the pandemic has been driven by a number of factors such as higher production costs, supply chain disruptions, and a sudden surge in demand. In the case of higher production costs, the increased price of inputs such as labour and raw materials, reduces the supply of finished goods and commodities. Businesses then pass on the added costs to the consumer in the form of higher prices. Economists refer to this as cost push inflation because less supply while demand remains constant, triggers the inflation of prices. Once COVID restrictions began to lift, the shift towards consumption on top of already weak and overburdened global supply chains, created an imbalance that continues to drive up food prices, putting a burden on households who spend 50 to 60 percent of their budget on food (Swanson 2022).

The United Nation's Food and Agriculture Organization (FAO) Food Price Index

The FAO food price index hit an alarming level of 130 in September 2020, due to the surge in post-lockdown demand and disruptions in the global supply chain.

Source: UN FAO

Two years later and global supply chain disruptions brought on by the pandemic, continue to be significant, with widespread knock-on effects. Shortages, blockages and delays are all being felt internationally even as global economic recovery is underway and a multitude of factors have led to these disturbances in global trade. Supply bottlenecks owing to suppressed production being met with sudden rebounds in demand, have created extensive gaps in essential food supplies; growing shipping costs are being passed on to the consumer in higher prices; port slow-downs due to port-worker shortages have seen a surfeit of containers stuck in transit, along with rising container storage rates; giant cargo ships running aground and stuck for days (Suez canal and more recently in the Chesapeake Bay); lastly, truck drivers are dropping out of the workforce (high retirement numbers due to an ageing workforce and workers leaving in search of better pay with benefits and improved working conditions are among the reasons for the driver shortage) and as a result, truck transportation costs have risen significantly. These supply chain disruptions have had a severe impact on trade and are among the factors responsible for the pandemic-era inflation. As we traverse this path of uncertainty, ensuring food security will require resilient supply chains together with even supply patterns.

Global container freight rate index from January 2019 to March 2022 (in U.S. dollars)

Container freight rates increased dramatically between January 2019 and March 2022. The year 2021 saw an especially steep increase in global freight rates, reaching a record price of nearly 10,400 U.S. dollars in September 2021. In March 2022, the global freight rate index stood at about 8,200 U.S. dollars (Placek 2022)

Source: Statista (2022)

According to the Global Survey of Consumers conducted by Deloitte (2022), real personal consumption expenditure (PCE), fell sharply in 2020 due to fear of COVID-19, social distancing measures and lockdowns. Based on results of the survey, personal savings increased as consumers held back spending on activities such as face to face entertainment, dining out and travel. Following the relaxing/removal of restrictions, pent up demand for these activities surpassed supply, attributable to accumulated savings. Also, according to data from the U.S. Chamber of commerce (2021), consumers are spending 20 percent more at grocery stores now, compared to before the pandemic. When lockdowns went into effect, “consumers were forced to pantry-load and their food buying habits have not really changed since then” says Curtis Dubay, senior economist for the U.S. Chamber of Commerce. This imbalance between aggregate demand and aggregate supply is referred to as demand pull inflation. “Too many dollars chasing too few goods”, puts upward pressure on food prices, followed by scarcity and the increased risk of food insecurity.

While each of these factors persist in overloading weak and dysfunctional global supply chains, this persistent dysfunction will remain front and center as the world economy finds its footing amid higher inflation rates and the looming threat of a food crisis.

Fossilflation

During the past two years of the pandemic, the global economy has been grappling with rising energy costs and since Russia’s unprovoked attack on Ukraine, uncertainty has continued to grow over oil supply disruptions, against the backdrop of already low inventories and higher demand, says Rob Wile of NBC News (2022). The average price of one barrel of Brent crude oil was $117.25 in March, a $20 increase from February, that has been attributed to the Russia Ukraine conflict. Fossil fuel prices have not only affected the amount paid at the pump, but they have also placed pressure on food prices (particularly imported goods), a term referred to by the European Central Bank (ECB) as “fossilflation”. This has been a burden especially for the Caribbean. Most of these Small Island States are largely dependent on imported food and are vulnerable to oil price shocks. Barbadian Prime Minister Mia Mottley warned that countries of the Caribbean are likely to see an increase in food prices due to the on-going conflict. During the Thirty-Third Inter-Sessional Meeting of Heads of Government of the Caribbean Community (CARICOM), Prime Minister Mottley acknowledged that though Russia and Ukraine may not be top trade partners of the Caribbean, supply chain challenges and rising freight costs may negatively impact prices that are expected to be felt within the region. For example, The World Bank (2022) predicts that Suriname and Haiti could experience double digit inflation in 2022, forcing the poorest and most vulnerable families further into poverty. A projection that is worrying and a major setback as the region attempts to recover from the effects of the pandemic.

Climateflation

There is no question that this current wave of record high inflation is being driven by a knotted global supply chain and rising energy costs. The root of the problem, however, extends much deeper than these two interrelated factors. Beneath the inflation-related headlines, economists say that extreme weather events tied to climate change are also contributing to inflation. This is where the term “Climateflation” comes into play and it refers to price increases caused by climate-related natural disasters and physical risks, says Isabel Schnabel, Member of the Executive Board of the European Central Bank (ECB) (2022). In her speech at The ECB and its Watchers XXII Conference, she warned that as the number of disasters and severe weather events continue to rise, so will their impact on economic activity and prices. Debilitating droughts, heavy rainfall and crippling frost are increasing the risk of large-scale crop failure, making food more expensive. To make matters worse, farmers often rely on chemical fertilizers to compensate for poor soil quality in areas that have experienced extensive degradation caused by extreme weather conditions. With near-record high fertilizer prices, this is creating a nightmare for farmers and further exerting inflationary pressure on food prices and by extension, placing significant pressure on households’ disposable income. With less available resources to purchase adequate amounts of nutritious food, families face the threat of malnutrition and starvation.

Food Price Inflation and Food Insecurity

Uncertainty continues to escalate as the world confronts the pandemic, geopolitical conflict and climate change. More-and-more, the United Nations Sustainable Development Goal 2 (SDG 2), Ending Hunger by 2030, appears unattainable due to this trilogy of events. The number of people facing acute food insecurity and requiring urgent food, nutrition and livelihoods assistance is on the rise says António Guterres, Secretary-General of the United Nations (FSIN 2021). Mr. Guterres credits the combination of conflict, climate disruption and economic shocks due to the pandemic, as the main reasons behind the rise in food-insecure households. According to the 2021 Global Report on Food Crises (GRFC 2021), “at least 155 million people in 55 countries were in crisis in 2020, an increase of around 20 million people from 2019.” This is a major concern for Latin America and the Caribbean (LAC) as prices are skyrocketing while wages remain below pre-pandemic levels (World Bank 2022). According to Carlos Jaramillo and Robert O’Brien of the World Bank, nearly 13 million LAC citizens will lose the opportunity to see significant improvement in their welfare. Caribbean islands such as St. Lucia, Jamaica, Haiti and Dominica were disproportionately affected by food insecurity during the pandemic due to their heavy reliance on food and non-food imports. This is likely to worsen, hitting the poorest and most vulnerable the hardest. This is especially concerning for LAC, a region ranked as the second most unequal in the world (UNDP 2021). Though it is uncertain when this current inflation surge will dissipate, what is certain is that there will continue to be an increase in income inequality and economic divergence unless the wellbeing of the most vulnerable is given top priority.

References

Deloitte. 2022. "Global State of Consumer Tracker." Deloitte. https://www2.deloitte.com/us/en/insights/industry/retail-distribution/consumer-behavior-trends-state-of-the-consumer-tracker.html.

Dubay, Curtis. 2021. "4 Factors Driving Food Price Inflation." The U.S. Chamber of Commerce. November 10. https://www.uschamber.com/economy/4-factors-driving-food-price-inflation.

FSIN. 2021. "2021 Global Report on Food Crises; Joint Analysis for Better Decisions." Food Security Information Network. https://docs.wfp.org/api/documents/WFP-0000127343/download/?_ga=2.50177953.684011520.1650753839-1320682706.1650753839.

Jaramillo, Carlos Felipe, and Robert Taliercio O'Brien. 2022. "Inflation, a rising threat to the poor and vulnerable in Latin America and the Caribbean." World Bank Blogs. April 18. https://blogs.worldbank.org/latinamerica/inflation-rising-threat-poor-and-vulnerable-latin-america-and-caribbean.

Placek, Martin. 2022. "Transportation and Logistics; Water Transport; Global container freight rate index from January 2019 to March 2022." Statista. April 11. https://www.statista.com/statistics/1250636/global-container-freight-index/.

Schnabel, Isabel . 2022. "A new age of energy inflation: climateflation, fossilflation and greenflation." European Central Bank. March 17. https://www.ecb.europa.eu/press/key/date/2022/html/ecb.sp220317_2~dbb3582f0a.en.html.

Swanson, Ana . 2022. "Food Prices Approach Record Highs, Threatening the World’s Poorest." The New York Times.February 03. https://www.nytimes.com/2022/02/03/business/economy/food-prices-inflation-world.html.

UNDP. 2021. "Trapped? Inequality and Economic Growth in Latin America and the Caribbean." UNDP Latin America and the Caribbean. July 01. https://www.latinamerica.undp.org/content/rblac/en/home/library/human_development/trapped--inequality-and-economic-growth-in-latin-america-and-the.html.

WSJ. 2022. "U.S. Inflation Accelerated to 8.5% in March, Hitting Four-Decade High." The Wall Street Journal . April 12. https://www.wsj.com/articles/us-inflation-consumer-price-index-march-2022-11649725215.

Wile, Rob. 2022. "The three forces driving inflation higher and what it will take to cool them off." NBC News. April 19. https://www.nbcnews.com/business/consumer/inflation-rate-higher-consumer-prices-driving-forces-rcna24128.

World Bank. 2022. "Inflation, a rising threat to the poor and vulnerable in Latin America and the Caribbean." World Bank Blogs. April 18. https://blogs.worldbank.org/latinamerica/inflation-rising-threat-poor-and-vulnerable-latin-america-and-caribbean.

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