Dangerous to assume that food price rise is just temporary blip

Food prices are going up. On international markets, the price of wheat has shot up by 40 per cent in the past two months. In China, the price of rice is up by 17 per cent from a year ago. Fresh vegetables are 22 per cent more expensive.

Yet neither policymakers nor analysts seem especially concerned that this unwelcome spike in food prices will fuel a sustained bout of broader inflation.

They argue that the recent rises in food prices have been driven by temporary supply shocks. Widespread fire damage to Russia's wheat crop has pushed up grain prices on international markets. Meanwhile in China the increase in food prices is blamed on the disruption caused by recent flooding. When the floodwaters subside, so will food prices.

These bland assurances may be justified when it comes to developed economies. The surge in wheat prices on international markets is beginning to look like a short-lived blip that is already starting to abate. And according to the US Department of Agriculture, US food inflation is likely to fall this year to its lowest level since 1992.

But the rise in Chinese food prices is another matter. While the recent flooding may well have contributed to short-term price increases in some areas, there are worrying signs that the overall upward trend is being propelled not by temporary supply problems but by a structural strengthening of demand.

This shouldn't be too surprising. Incomes are rising in China. According to official data, average earnings have risen by 17.5 per cent over the last year. And the poor have done even better than average. The media are full of stories about how statutory minimum wages have risen by 30 per cent or more in some of China's most impoverished provinces.

When incomes go up, earners don't typically rush out and splurge on new televisions, air-conditioners or cars. But they do treat themselves to a richer diet.