World Food Prices Hit Five-Year High as Inflation Pressures Slowly Simmer in Major Global Economies

The UN's Food Price Index hit a five-year high last month as biofuel demand boosted oil and sugar prices, adding upward inflation pressures amid surging oil prices and improving global economic growth.
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Global food prices rose to the highest level in five years last month, according to the United Nations' FAO price index, suggesting corresponding increases in consumer inflation as oil holds near multi-month highs and the world's biggest economies show signs of sustained growth.

The benchmark FAO Food Price Index, which tracks monthly changes in the international prices of commonly-traded food commodities, jumped 2.5% in December to the highest level since 2014. Biofuel demand, which drives up prices for commodities such as palm oil and sugar cane, was a key component in the December increase, which helped boost overall 2019 food prices by 1.8%.

Food price increases are an important component for inflation calculations in emerging market economies, comprising a much larger portion of the consumer price "basket" than in developed economies such as the U.S. and Europe.

However, with global oil prices trending near the $70 dollar per barrel mark amid ongoing Gulf tensions, OPEC production cuts and political crises in Venezuela, concurrent increases in both food and energy prices could give rise to sustained inflation pressures, which could compel global central banks to reverse some of the monetary easing -- via higher interest rates -- that have been supporting equity markets around the world.

Even in Europe, where the ECB has been -- unsuccessfully -- attempting to stoke inflation for the past four years with a combination of negative interest rates, unlimited liquidity for the banking system and billions in government bond purchases, is finally starting to seeing a creeping increase in consumer prices.

Headline inflation in the single currency area accelerated to 1.3% in December, from 1% in the previous month, as energy prices continue their 35% year-on-year rise following OPEC's increased production cuts and the flaring of U.S.- Iran tensions in the Gulf region. 

European labor markets and service sector activity are also starting to improve, which, when added to sustained increases in food prices, could finally give new ECB President Christine Lagarde the ammunition she needs to reverse some of the Bank's unpopular monetary policies.

In the U.S., November consumer spending rose 0.4%, which house prices showed increasingly robust signs of growth, helping the Federal Reserve's preferred measure of inflation, the PCE Price Index, rise 1.5% on a year-on-year basis.

While in both cases -- Europe and the U.S. -- inflation rates remain firmly below each central bank's 2% inflation target, near-term pressures from things like food and energy prices are prompting modest reactions in the bond market, where investors are most sensitive to changes in inflation dynamics.

Benchmark 2-year Treasury bond yields, for example, have risen more than 12 basis points over the past three months and are now trading at 1.587%. Ten[--year note yields, meanwhile, have jumped more than 30 basis points to 1.872%.

Food price increases alone aren't likely to sway the Fed from its desire to see "persistently higher inflation" before embarking on a rate tightening cycle, and rising energy prices could be quickly reversed by either a set-back in U.S.-China trade talks or the continued supply increases from shale oil production and OPEC cut regression in the coming months.

What seems clear, however, is that inflation increases are finally starting to find traction in the world's biggest economies after the years of stagnation that followed the global financial crisis in 2009. 

Should that continue, the foundation of low -- or negative -- interest rates that has underpinned the longest bull market in history could be slowly dismantled, with risk-asset repricing to follow shortly after.