MercoPress. South Atlantic News Agency

IDB opens discussion on food prices shock, inflation and protecting the urban poor

In countries with flexible exchange rates the food prices impact is more modest

Rising international food prices could trigger an acceleration of inflation in several countries in Latin America and the Caribbean this year, highlighting the need for policies to protect the urban poor, according to a new study by the Inter-American Development Bank, (IDB).

Net food importers with a greater share of spending concentrated on tradable foodstuffs and with little room to let their currency appreciate will be the hardest hit by higher international food prices, according to the study. The urban poor that do not have access to any enhanced income from self-grown products are most at risk from the food price shock.

“There is a need to increase and improve targeting of aid, perhaps through reformed conditional cash transfer schemes, to these groups to compensate the effect of the food price surge,” according to the Policy Note published by the IDB’s Research Department. “How will the food price shock affect inflation in Latin America and the Caribbean.”

Flexible exchange rates in other countries tend to offset the impact on domestic prices but this raises other concerns. A significant nominal appreciation may affect the competitiveness of other tradable sectors. The challenge for net commodity exporters is to harness the current windfall and ensure that the economy remains competitive.

The report estimates the potential inflationary impact of higher international food and oil prices for 13 countries in the region and discusses policies that can be used to alleviate the impact of higher food prices on inflation. The study concludes that rising oil prices will only significantly affect inflation in a small number of countries in the region this year.

The report concludes that due to the food price surge, increases in inflation could exceed 5 percentage points in Bolivia, Dominican Republic, Guatemala and Honduras unless additional policy actions are taken.

In some countries with flexible exchange rate systems, such as Brazil, Colombia and Mexico, currencies tend to appreciate as a response to higher food prices and as a result the impact on domestic prices is muted. However, there is no simple pattern of differences between floaters and fixers; the speed and extent of pass-through is quite heterogeneous and dependent on factors such as the importance of food in the overall inflation index and local policy measure

The thirteen countries involved in the report are Bahamas, Bolivia, Brazil, Colombia, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Panama, Peru and Uruguay.