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Rising food prices may harm the U.S. more than oil shocks

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Food, glorious food, it turns out, can also lead to economic indigestion.

Unexpected declines in global food production can roil the U.S. economy in a much more damaging way than had been previously thought, according to new research from Jasmien De Winne and Gert Peersman of Ghent University published by the Brookings Institution. Their research was prompted by “huge swings” in food commodity prices since 2000, which has reignited debate about the link between food prices and the economy.

Food shocks around the world, which have been aggravated in recent years by global warming, have a much greater impact on the U.S. economy than even an oil shock, the researchers conclude. Examining data from 1963 to 2013, they found that a 5 percent increase in food commodity prices leads to an almost 1 percent decline in U.S. GDP growth the following year.

“The impact of a rise in real food commodity prices on economic activity is roughly twice as large as the impact of a rise in crude oil prices of equal size,” the study noted.

Food price shocks touch everything from consumer consumption to the Federal Funds rate, with the research finding that interest rates increase by 24 basis points after a food price shock, compared with a decline of 20 basis points for an oil shock. 

In other words, monetary policy appears to exacerbate the impact of a food price shock on the economy by increasing borrowing costs, while stabilizing the economy following an oil shock.

Food price increases may prompt households not only to cut back on food but also to trim expenses on a wide range of goods and services. Low-income households are more likely to cut back given their lack of financial resources, they noted.

“When food prices increase, households may decide to consume less and increase their precautionary savings because of a rise in uncertainty or a greater perceived likelihood of future unemployment and income loss,” the report said.

Food price surges contributed to several downturns, including the recessions in 1974, 1982, the early 1990s, 2001 and the 2008 economic crisis, the researchers found. On the flip side, lower food prices helped spur economic growth from 1967 to 1972, the mid-1980s, from 1997-2000 and between 2003 and 2005.

Unfortunately, American consumers may be in for more food price shocks as climate change leads to a warmer environment. Higher temperatures across the globe have been cited as the world’s biggest economic risk by the World Economic Forum, thanks to forecasts for water and food shortages as a result.

The researchers noted, “With global temperatures expected to rise substantially over the next decades, understanding these relationships will become even more important in the future.”

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