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Conclusion: Global CPI measures are not apples-to-apples and may provide a leading indicator as to the nations where monetary policy will tighten the quickest in 2011.

We looked at the CPI breakdowns for the largest ten countries in the world by population with a specific focus on the contribution from food and beverages as a percentage of CPI to better understand the implications of rising food commodity prices.  Below we’ve outlined these contributions of food and beverage to CPI by country:

Contribution of food and beverage to CPI by %

China – 33%

India – 14%

United States – 16%

Indonesia – 36%

Brazil – 23%

Pakistan – 40%

Bangladesh – 59%

Nigeria – 50%

Russia – 38%

Japan – 26%

As can be seen, the differences between countries are quite dramatic.  Now, obviously, population is only relevant to a point and to the extent we want to consider an increase in inflation, and subsequent tightening of monetary policy, the size of the economy matters as well, especially as we consider the potential impact to slowing global growth.  As it relates to interest rates, most federal banking authorities look at CPI as key measure of inflation from which to set interest rate policy.  Assuming food input costs stay flat, or increase, CPI comparisons will continue to drive high inflationary numbers based on easy y-o-y compares.  As a leading indicator for which countries will implement tighter monetary policy over the coming quarters, those countries that have the highest percentage of commodities in their measure of CPI is a good place to start.

The other issue to consider is social unrest related to inflation, a tail risk that needs to be seriously considered.  Especially given the dramatic gains in food priced we are seeing, such at the 52% gain in corn last year and the 47% gain in grain prices. We are already starting to see some unrest globally and, in fact, have seen some riots in Algeria.  The picture below was taken in the Algerian capital as hundreds of youths protested and clashed with police.  According to reports from Algeria, “The cost of flour and salad oil has doubled in recent months, reaching record highs. A kilogram of sugar, which a few months ago cost 70 dinars, is now 150 dinars (£1.28).”  No doubt we will see more such scenes in the coming year.

 Apples To Inflated Apples: Comparing Global CPI Breakdowns - 1

While we wouldn’t expect inflation riots in the U.S. due to higher food prices, food inflation is becoming a more pertinent issue domestically with the growth in Americans using food stamps.  In the chart below, prepared by Rory Green from our Restaurant Team, the trend is quite clear.  An increasing amount of low income Americans are depending on a fixed amount of food stamps to subsist.   As food prices go up, these food stamps buy less food, which squeezes the low end consumer.  Currently, 43.2MM Americans are in the Federal Food Stamp Program.  For those Americans, I’m guessing food is more than 16% of their budget.

Daryl G. Jones

Managing Director

Apples To Inflated Apples: Comparing Global CPI Breakdowns - 2