Perils in The Price Of Rice
You may have missed the front-page article in the New York Times last Saturday, with the one-column headline written in clipped newspaperese: "High Rice Cost Creating Fears of Asia Unrest." But this little story could be an early warning of another big economic problem that's sneaking up on us.
The new danger is global inflation -- most worryingly in food prices, but also in prices for commodities, raw materials and products that require petroleum energy, which includes almost everything. Prices for these goods have been skyrocketing in international markets -- at the same time the Federal Reserve and other central banks have been hosing the world with new money in their efforts to avoid a financial crisis.
That's an explosive mixture. It risks a kind of inflation that would trigger panic buying, hoarding and fears of mass political protest. Actually, this is already happening in Asia, according to the Times.
The price of rice in global markets has nearly doubled in the last three months, reports the Times's Keith Bradsher. Fearing shortages, some major rice producers -- including Vietnam, India, Egypt and Cambodia -- have sharply limited their rice exports so they can be sure they can feed their own people.
Bradsher summarizes the evidence that food shortages and inflation are fueling political unrest: "Since January, thousands of troops have been deployed in Pakistan to guard trucks carrying wheat and flour. Protests have erupted in Indonesia over soybean shortages, and China has put price controls on cooking oil, grain, meat, milk and eggs. Food riots have erupted in recent months in Guinea, Mauritania, Mexico, Morocco, Senegal, Uzbekistan and Yemen."
World Bank President Robert Zoellick rang the alarm bell in a speech yesterday. He noted that since 2005, the prices of staples have risen 80 percent. The real price of rice rose to a 19-year high last month, he said, while the real price of wheat hit a 28-year high.
Zoellick warned that this inflation is having political repercussions: "The World Bank Group estimates that 33 countries around the world face potential political and social unrest because of the acute hike in food and energy prices." To cope with the topsy-turvy economy, Zoellick made an innovative proposal that countries running a surplus, such as Saudi Arabia and China, devote 1 percent of their "sovereign wealth" funds to investment in Africa's poor countries. That could yield up to $30 billion in development spending.
Now, cut to the Federal Reserve. At a time when global inflation is raging, you might expect that the central bank's first priority would be to dampen inflationary expectations in the United States. But because of its worries about a financial meltdown, the Fed has been doing the opposite -- drastically cutting interest rates in an effort to unclog the financial markets. The cheap money didn't stop the Wall Street bank run -- it was the Fed's bold plan to absorb subprime debt that did that -- but it may well add fuel to the inflation fire.
I spoke this week to Richard W. Fisher, the president of the Dallas Federal Reserve Bank and the leading inflation hawk on the Fed's Open Market Committee. He opposed the last two rate cuts, arguing that they could boost inflation without easing the financial mess. Fisher sees the booming Asian economies creating a classic "demand-pull" inflation that is propelled by 3 billion new participants in the global economy who, he says, "want to eat like you, dress like you, live like you."
"We cannot accommodate inflation," argues Fisher. "Once it takes a grip, it changes people's behavior. It's bad for investors, for workers, for savers, for people on fixed incomes."
Yet this global inflation is already beginning to feed into the U.S. economy. Including food and energy, Fisher warns, the Fed's measure of consumer prices was up a "worrisome" 3.7 percent for the 12 months ending in January. And the latest figures from the European Union show that inflation there rose to a 3.5 percent annual rate in March, the highest level since the index was created in 1997.
"You cannot think in a purely domestic context about the pricing of oil or steel or pulp or shoes or clothing," Fisher said in a speech last month in London. For that reason, he continued, "We cannot, in my opinion, confidently assume that slower U.S. economic growth will quell U.S. inflation and, more important, keep inflationary expectations anchored."
Independent truck drivers in Pennsylvania, New Jersey and other states staged protests against high fuel prices this week. What do they have in common with rice consumers in Vietnam and soybean buyers in Indonesia and pasta aficionados in Italy? More than they probably think.