EM Food Inflation: Upside Pressures Globally, But Heterogeneous Local Exposure

Research evidence excerpt

EM Food Inflation: Upside Pressures Globally, But Heterogeneous Local Exposure

Goldman Sachs EM Macro Themes

Food price shocks have historically been frequent and large across emerging markets

(EMs), more so than in developed markets (DMs). These shocks tend to be driven by a

combination of rising energy costs and restrictive trade policies (2007-2008 food

shock), exacerbated by severe weather events in major exporting regions (2010-2012

price spikes) or geopolitical fragmentation and supply chain bottlenecks (Russia’s

full-scale invasion of Ukraine in 2022).

Following the start of the Iran war, the sharp increase in oil prices and the accompanying

shortage of physical oil supply have rapidly passed through into diesel and fertilizer

markets – both of which are essential raw inputs in food production, with prices up by

around 50-60%yoy. Additionally, climate experts are warning of El Niño weather

patterns later this year, which are likely to translate into adverse conditions for

agriculture, therefore implying regional supply risks that may extend into 2027. The El

Niño effects this year are expected to be particularly severe given meteorological

predictions for a larger-than-usual increase in Pacific Ocean sea surface temperatures,

on top of an already record-warm planet. As a result, concerns around EM food inflation

have re-emerged.

In this EM Macro Themes, we examine the principal drivers of EM food inflation,

distinguishing between and statistically identifying global, regional and local factors

across countries. Using our modeling framework, we link movements in soft

commodities, fertilizer and diesel prices, and the US Dollar to globally driven food

inflation. We then present our view on where food inflation is likely headed and provide