Declining food prices increase the risk of global deflation

The decline in prices has been reflecting record harvests and weak global demand

International food prices have been declining in recent months, reflecting record harvests and weak global demand, a new report has said.

According to the Qatar National Bank (QNB) report, declining food prices have in turn contributed to lower inflation in the Eurozone, the UK and the US.

This trend, coupled with a weak Eurozone recovery and mixed economic data in the US, suggests that the risk of global deflation remains high.

As such, major international banks like European Central Bank (ECB), the Bank of England and the Federal Reserve can be expected to keep record-low interest rates for an extended period of time.

Since the peak in 2011, global food prices have dropped significantly, largely in response to recent bumper harvests.

According to the International Monetary Fund (IMF), maize prices have fallen 41% since their peak in 2011. Over the same period, rice prices have fallen nearly 31% and wheat prices have declined 20%.

These large declines are feeding into lower food prices for consumers around the world. While lower food prices would normally be a good thing as they lower living costs, this decline comes at a time when inflation is already very low in advanced economies and could turn inflation negative, namely deflation.

This is a cause of concern as deflation increases the real value of outstanding debts in the economy which can in turn reduce the available income available for consumption and lead to lower growth.

Looking ahead, the IMF is projecting a further decline in global food prices (averaging -3.8 % in 2014-15) on record yields, the report said.

The global food production outlook continues to remain favorable, with the supply of major grains and oilseeds projected to surpass demand growth for the next two years.

Furthermore, China expects increased production of corn and wheat as a result of favorable weather, while global rice supplies continue to be plentiful.

For the global economy, lower food prices for the next 18 months could mean a higher risk of deflation.

At the current juncture, Eurozone inflation has fallen to its lowest level in July 2014 (0.4% year-on-year) since the height of the financial crisis in 2008-09, sliding further into what the ECB has described as a 'danger zone'.

Overall, global inflation is very low by historical standards and the QNB report warns it is heading lower.