Easing Food Prices Should Help Reduce Inflation Pressures

Global food prices last month dropped from a near-record high on dollar strength, recession fears, and the prospects of fresh supplies.  A United Nations (UN) index of world food costs slid -2.3% in June, which should slowly begin to ease inflation pressures.

During the pandemic, food prices soared as supply-chain issues, and surging transportation costs helped fuel a surge in U.S. consumer prices to their fastest pace in 40 years.  Food prices spiked even higher earlier this year after the start of the war in Ukraine curbed grain exports from the country known as the breadbasket of Europe.

Agricultural prices have finally begun to ease as harvests in the Northern Hemisphere start and on worries about an economic slowdown.  Also, the recent surge in the dollar to a 20-year high is undercutting commodity prices and helping to ease inflationary pressures further.  Last month’s -2.3% decline in the UN’s food gauge was the third consecutive monthly decline.  However, the index is still up +15% this year, and the recent drop hasn’t been as sharp as the slide seen in crop futures prices, indicating consumers still feel the pinch of high food prices.

Declines in grains, vegetable oils, and sugar prices drove the decline in the UN food index last month. Corn, wheat, and palm oil futures tumbled at least -18% last month on worries that an economic slowdown will curb demand for commodities.  However, dairy prices rose, and meat costs surged to a fresh record high due to tight chicken supplies amid the war in Ukraine and bird-flu outbreaks in some countries. 

The chief economist at the UN’s World Food Program said food prices still remain very high and, along with expensive fuel, are contributing to a cost-of-living crisis that has led to worker strikes in some countries.  Also, according to the FAO, the slow pace of grain exports in Ukraine due to the war is boosting the country’s grain stockpiles.  FAO estimates Ukraine’s corn stockpiles could reach six times their pre-war level as seaborne grain trade in Ukraine has ground to a halt.  A more sustained downturn in food prices will be needed to bring inflation pressures down even further.

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