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If food costs more, will you buy any less? Surprisingly enough, that simple question may be the key to whether 2011 sees a strong rebound in economic growth, or is, instead, a bust.
The issue is that raw food prices are indeed way up. Corn is at a two and a half year high. And some think it could rise by another 30% this year. Sugar was up 77% in the last six months of 2010. Beef prices are up as well. On the face of it, climbing food prices seem like a bad thing. It can cause inflation and cause people to buy less of everything else. Rising food prices have already lead to violent riots in Tunisia and Algeria. But a number of economists, including Goldman Sachs' Andrew Tilton and IHS Global Insight's Nariman Behravesh, say this time around, food prices won't necessarily be a recovery killer. Here's why:First of all, food prices might not be as much of a driver of economic growth as many people think. In a recent research paper World Food Prices and Monetary Policy published by the National Bureau of Economic Research, Luis Catao, of the International Monetary Fund, and Rutgers University economist Roberto Chang argue that rising food prices do not always lead to slower growth. In a number of scenarios, economic growth will actually increase after a rise in food prices.
How could that be? The real determinate of whether an economy will grow or shrink has more to do with policy makers response to rising food prices. A gradual increase interest rates by a central bankers will eliminate any adverse effects of climbing food prices, and may actually boost growth.
The problem, for that scenario, is that around the world most policy makers have generally followed a policy of keeping rates as low as possible. Low rates tend to cause your local currency to fall, and that can boost exports. But that might soon be changing. Rising inflation in India and elsewhere may soon force a number of countries to raise interest rates. Indeed, China has already begun raising its lending rates. Of course, in the US, Bernanke & Co. seem to have no plans to raise rates anytime soon.


Read more: http://curiouscapitalist.blogs.time.com/2011/01/20/will-rising-food-prices-kill-the-recovery/#ixzz1BhgnUBcy