Food and energy prices surged toward record highs over the past few years, owing to global shocks related to the COVID-19 pandemic and the war in Ukraine, prompting significant supply disruptions. This contributed to inflationary pressures and a cost-of-living crisis.

Moreover, the note says that global growth remains subpar and commodity terms of trade volatility has likely had further adverse impact. While goods and fuel price inflation has recently moderated, price levels remain uncomfortably high for people around the world.

International food commodity prices rose 38 per cent between January 2020 and February 2022 and rose sharply again following Russia’s invasion of Ukraine before peaking in March 2022. In just a month between February 2022 and March 2022, Global wheat prices jumped 38 per cent.

Energy prices, at the same time, increased with oil prices approximately doubling between January 2020 and their peak in March 2022. Price of gas in Europe rose to unprecedented highs, and at their peak in August 2022, European gas prices were nearly 30 times higher than in January 2020.

Prices of some fertilizers, for example urea, nearly quintupled between January 2020 and their peak in April 2022 and despite some recent declines, were still four times as high in December 2022.

While both food and energy commodity prices have moderated from their peaks, they remain elevated. Moreover, while international commodity prices were at similar highs during the global financial crisis, the current cost-of-living crisis is particularly challenging as it is occurring on the back of a global pandemic and in the context of persistent broad-based inflationary pressures in most economies.

In general, increase in international food prices pass through to domestic food prices, and higher domestic food and energy prices put upward pressure on headline inflation. In 2022, headline inflation picked up strongly in most G-20 economies. While a large share of the increase in headline inflation related to the direct importance of food and energy in the consumption basket, core inflation also picked up amid tight labour markets. Core inflation has yet to ease in many G-20 economies and headline inflation remains elevated.

The result has been a cost-of-living-crisis, with the most vulnerable households and economies disproportionately exposed to the increase in prices. Households of low-income and emerging market economies tend to more exposed to food prices than advanced economies. Food insecurity has been on the rise since 2018, worsened marked during 2020-21, resulting in increase in the number of undernourished people globally by 150 million.

Moreover, the World Food Programme estimates that about 345 million people across a sample of 79 countries will be food insecure in 2023 – almost 200 million more than in early 2020. Low-income households negatively impacted by energy price increases since it leads to higher prices of other goods in the supply chain and push up prices more broadly via second-round effects.

In addition to higher import costs (also on account of exchange rates) of agricultural inputs such as fertilizers, seeds, and fuel contributed indirectly to food price inflation.

Global growth projections have been downwardly revised by the World Economic Outlook to only 2.9 per cent for 2023. In addition to elevated price levels, heightened volatility in commodity terms of trade growth has likely adversely impacted growth. Moreover, it has been warned that higher volatility of changes to commodity terms of trade may also increase volatility in headline inflation.

While both energy and food price inflation has seen upward pressures from supply constraints and other disruptions, there are also important interlinkages between the two. Notably, higher energy prices drive food prices higher as they increase the cost of food production. Global energy and food prices often co-move, in part as energy price inflation feeds into food price inflation.

While commodity price pressures have somewhat receded, they remain high by historical standards and inflation continues to weigh on purchasing power. Moreover, disruptions in these markets could reappear, posing a further threat to food and energy security. Rising geoeconomic fragmentation and climate change are adding to the risks.

Continued elevated food and energy costs or further shocks to these markets could have sever macroeconomic consequences. In the near term, upward pressure on energy prices could arise due to both demand and supply shocks, albeit with different implications for global economic activity and attendant policy challenges. Further intensification of war in Ukraine could also adversely impact the economic activities.

Key risks relate to the further erosion of real incomes, and hence, demand. Additionally, unfavorable inflation developments could force central banks to hike policy interest rates beyond expectations, including if cost-of-living pressures feed into wage-price spirals. Resulting higher borrowing costs would be particularly challenging for vulnerable economies with elevated debt burdens.

Further, geoeconomic fragmentation could also exacerbate food and energy concerns. People and economies highly dependent on trade for basic food needs are particularly exposed to disruptions in commodity trade. (IPA Service)