June 08, 2008	Sunday	Jamadi-us-Sani 03, 1429

ISLAMABAD, June 7: The surge in global inflation has affected developing economies more than developed economies, because the share of food in consumption baskets of the former is significantly bigger than the latter.

According to SBP sources, factors affecting global inflationary pressures include increase in global commodity demand, supply issues, and growing interest of investors in commodity markets on the back of a weak dollar and falling interest rates.

Prices of all key commodities have witnessed significant growth since July 2007, they said.

While increase in prices of food commodities like rice, wheat, and edible oil is mainly because of relatively disappointing harvests, which could improve in succeeding years, other factors — the increased demand from emerging economies and increased use of bio-fuel as an alternative energy source — that are not likely to change are also affecting its increase.

They said that link of food prices with energy cost, is particularly troubling, given that energy prices are likely to remain significantly above historical norms in the foreseeable future.

“The surge in global inflation has affected developing economies more than the developed economies, because the share of food in the consumption baskets of developing economies is significantly higher than developed countries”.

Moreover, they said, the greater use of processed food in developed economies meant that the impact of a rise in commodity prices was muted in food inflation for these economies, as commodity prices account for only a small share of the prices of processed foods, many processed food industries either have long-term supply contracts, or hedge their price risk, they said.

Not surprisingly, they said, therefore, fiscal measures (tariff cuts and subsidies) aimed at partially protecting the general population from the impact of rising food and energy prices were more evident in developing economies.

However, in countries where the fiscal deficit is already large, the fiscal measures to contain the impact of rising international food prices on domestic inflation are likely to prove unsustainable.

The said a number of developing economies had introduced additional measures to rein in the rising food prices.

They said some major rice exporters have banned rice export (staple food of half of the world population) to ensure availability (and low prices) in their domestic markets.

Such measures had disrupted supplies in the world commodity market, and pushed up the food prices even higher across the globe, they remarked.

The SBP sources said that limitations of fiscal and administrative policies to contain inflationary pressures implied that the burden on monetary policy to contain inflationary pressures increased.

Thus, monetary policy is tighter in most emerging economies in the current spell of price hike. However, given that food inflation has taken less of a toll in developed economies, and that aggregate demand in these is already feared to be hit by the on-going financial crisis (which would help reduce inflation), monetary authorities in these economies have largely either loosened their monetary posture or are holding to a neutral stance, they said.—APP