Standard Chartered analysts Ethan Lester and Madhur Jha highlight that rising oil prices can quickly impact global food inflation, primarily through increased fertiliser costs and trade bottlenecks. They emphasize that the global trade in fertilisers is particularly exposed to disruptions in the Strait of Hormuz compared to other producer inputs, making the sector vulnerable to geopolitical tensions such as the ongoing US/Israel-Iran war [1].
The report notes that governments have so far avoided implementing new market interventions to directly contain food CPI inflation. This restraint is attributed to the historical tendency for natural gas price increases, which are more critical for fertiliser production than oil, to be more transitory than oil price spikes. Additionally, governments continue to uphold significant structural commitments to the agriculture sector [1].
Fertiliser affordability was already under pressure due to recent protectionist measures by major trading economies, including China and the EU. These factors suggest that there are upside risks to food CPI inflation even before the recent rise in energy prices [1]. According to the IMF, a 10% increase in oil prices over the course of a year could raise global inflation by approximately 40 basis points [1].
The analysts also point out that consumer psychology will likely drive significant variations in food CPI inflation across different economies, as consumers tend to pay close attention to the prices of goods they purchase regularly [1].
CONCLUSION
Standard Chartered's analysis underscores the risk that higher oil prices could quickly elevate global food inflation, especially in economies where fertiliser affordability is already strained. With governments refraining from direct interventions and protectionist measures compounding the issue, the market should remain alert to potential inflationary pressures in the food sector.