Food rising prices can be volatile.

While energy prices continue to be a source of inflationary pressure in many countries around the world, certain emerging-market countries are dealing with a different issue: Their currencies are becoming fragile due to the rate of food price inflation.

The United Nations’ February World Food Price Index, announced on Friday, remained almost constant at 20.7 percent year on year vs. 19.2 percent in January, somewhat surprisingly given the recent rally in soft commodity prices such as corn and wheat. However, inflation gauges are notoriously lagging indicators, and the index should soon begin to reflect recent rises in weak commodity prices. read the latest news Russia withdraw troops from Ukraine-demands Russia

Because oil is a significant component in fertilizers, Monday’s increase in energy prices poses an additional risk to food prices. Furthermore, food costs tend to outpace worldwide headline inflation. According to the figure below, global CPI should fall over the next three to nine months, although there are downside risks if energy costs continue high.

Food accounts for a far greater proportion of headline CPI baskets in EM nations than in DM countries. Food accounts for about half of India’s CPI basket, and more than a third of it in the Philippines, China, and Russia, whereas it accounts for 10-15% in European countries and only about 8% in the United States.

As seen during the Arab Spring in the early 2010s, Rising food costs can be highly destabilizing. Their impact on broader inflation is expanding, and hence the risk they pose to EM countries is increasing. Food accounts for about a third of the median EM country’s current year-on-year headline CPI. Food accounts for nearly half of Russia’s current CPI level of 8.7, but in the United States, the United Kingdom, and much of Europe, food accounts for barely 10% or less of headline CPI.

Food inflation is a threat to currencies. We may plot the six-month change in the food CPI’s contribution to the headline vs. the six-month change in the money for each country. Given the rise in food prices, the Taiwanese dollar, Mexican peso, Colombian peso, ringgit, rupiah, and yuan appear vulnerable among EM currencies, as shown in the chart below. Turkey is literally off the charts, with food accounting for an additional 8.5 percent point increase in CPI over the last six months, while Russia’s currency has already plummeted due to sanctions.

As currencies fall, the potential of an inflation cycle in emerging markets rises as the cost of imported commodities rises even further.

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