The term agflation was coined by Merill Lynch early last year and reflects the global trend of rising food prices (Merrill Lynch’s report by Richard Bernstein and Jose Rasco, titled “Global Agriculture and Agflation“). A quote:

“Food prices are rising, putting upward pressure on producer and consumer inflation. Agflation has begun. Given the expanding constraints on food supply, the changing demand for food, and the entrance of the energy business as mass consumers of food products it is not surprising to see food prices rapidly putting upward pressure on overall inflation.

This can be good news for the food companies who are attempting to pass along those higher food input prices to the consumer. They are maintaining or expanding margins and they are hopeful that the constraints on food supply and the changing and expanding global demand for food products will continue to put upward pressure on prices.”

How do you measure agflation? Take foodstuffs component of CPI basket in a large sample of countries and calculate how these prices changed over the last 12 months, right? Wrong. More and more countries faced with rapidly rising food prices implement price controls (Russia, China, recently Gulf states, see

FT article). A quote:

“The United Arab Emirates is considering building a strategic reserve of essential foodstuffs as the government seeks ways to curb rampant inflation to a new target of 5 per cent in 2008.

Sultan al-Mansouri, the UAE’s newly appointed economy minister, said on Wednesday the federation would within six months complete a feasibility study on building six months’ worth of staple food reserves to enable the government to control food prices as it seeks to tame inflation.” […]

“Mr Mansouri on Wednesday also signed an initial agreement with a co-operative supermarket chain to maintain 2007 prices in 16 basic foodstuffs throughout 2008. Union Co-op will spend Dh45m ($12m, €8m, £6m) to absorb expected food price rises of up to 40 per cent this year on rising domestic demand and global food price increases.” […]

“Mr Mansouri said the government would consider introducing price curbs in the coming year. Abu Dhabi and Dubai have already introduced biannual rent caps of 5 per cent in a bid to cool the rental market in the UAE’s two largest cities.

The government is also considering subsidising essential foodstuffs for its citizens, who make up one-fifth of the expatriate-dominated UAE. Other Gulf states such as Saudi Arabia, Kuwait and Oman have introduced some food subsidies, as states try to ease inflation without resorting to the political and economic minefield of revaluation or delinking from the dollar peg.”

Those of us who lived in socialist or communist economic regimes know very well that price controls can reduce official inflation, but  they give birth to black market, rationing, or higher deficits. It the case of Gulf states these economies have huge fiscal surpluses amid record high oil prices, so they can afford running expensive subsidies to avoid social unrest. However side effects may be severe. Price distortions may provide bad incentives to farmers and the output response to growing world food prices may be weaker.

Another issue is a policy now pursued by a growing number of countries to increase inventories, which is pondered by the UAE as well. In the short-run this factor could fuel world demand for food and could hurt poor people even more. In my forthcoming book “Gordian knots of the 21st century” (co-written with two fellow-economists) I call such a policy “political cannibalism”.

The bottom line is, that the measures of agflation may understate the size of the actual price changes amid state price intervention. I hope that one day some investment bank does research to calculate what the effect might be, if I find out I let you know. But aflation will very likely be accompanied by agflation deficit (fiscal subsidies, falling retailers margins, etc.) in the coming years. In some parts of the world the free market is in retreat indeed. Welcome to the 21st century.