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That witch, inflation, hurts us more without protection


Anyone in Britain alarmed by rising inflation should look to an Indian villager for understanding about the latest worry in the global economy. Last year a village schoolteacher wrote a cracking song – featured in this year's Indian Oscar entry for best foreign film, Peepli Live – that distils the world's macroeconomic worries: "Friend, my husband earns good money but inflation, that witch, eats it all away. / Every month petrol leaps, diesel is on a roll, sugar forever soars, rice flies out of reach too. Inflation, that witch, eats it all away."

 

The poor spend a greater proportion of their income on food and fuel, and so, when the prices of both start to rise, poorer households suffer more. Petrol, diesel, sugar and cereal prices are all up. Poor women, invariably responsible for household food purchases, are hurt far more than men – which is why they've protested in India, where food inflation soared to 19.8% just last month.

 

In the UK, today's inflation figures of just 3.7% caused alarm – containing much higher rises in food and fuel costs and disproportionately hitting poorer families there as elsewhere. Of course, it's not just Britain or the subcontinent where staples are becoming more expensive. The UN announced that its global food price index is now higher than it has ever been. Already this year, protesters have taken to the streets in India,Jordan and Algeria.

 

Whence the price rises? One of the reasons for food and fuel inflation lies in bullish views of the economy. The price of oil is nudging $100 a barrel again. Not only does this bump the price of fossil fuels directly, but it hits food too. When the price of oil is high, it becomes economically attractive to divert crops from use in food to use in biofuels.

 

Others blame the weather for the inflation: La Niña, the periodic wobble in Pacific ocean weather that ripples across the planet, hasn't only been blamed for the catastrophic floods in Brazil. Argentina has experienced unusually dry conditions, which have lowered the expectations for their exports of corn and soybeans. Floods in Australia and Indonesia have also stymied production, and last year's wildfires in Russia only made things worse.

 

It's true that weather events have had an impact on global markets, but this is hardly the first La Niña. The historian Mike Davis, in his magisterial work Late Victorian Holocausts, looked at how the world responded to the cyclical El Niño/La Niña shocks throughout the 19th century. In the 1800s, the effects were survivable – but by the 1890s, in the so-called "golden age of liberal capitalism", weather shocks were being transmitted directly to the poor through the newly established system of global commodity markets. And it's these markets that have recently gone into overdrive.

 

Deborah Doane of the World Development Movement has noted that more than $200bn has been poured into food markets since the financial crisis by speculators hunting for profit, creating volatility. The leading international grain-trading companies are doing well as a result. The US agricultural giant Cargill reeled in $1.49bn in windfall profits in its last quarter, three times its profits the year before.

 

It might seem like there's nothing new here. Climate shocks, shoddy government policy, scalping by traders, speculation by bankers, biofuels, and a rising oil price. We're not in 2008, though. The oil price isn't quite in the $150-a-barrel recession-precipitating territory yet – but that's as far as the good news goes. There are other reasons to worry. More than a billion people went hungry in 2009, and the shock of the past two years has stripped assets away from the poor – in order to survive poverty, many have been involved in distress sales. The last two years' hunger and malnourishment will have indelibly affected an entire cohort of children. The recession has meant that more people are vulnerable to systemic shocks.

 

But governments are less ready to buffer those shocks. Perhaps the most significant difference between 2008 and now is that governments are no longer in recession-fighting mode – they're in inflation-fighting mode. That's a problem when you look at the kinds of policies that worked to feed the poor over the past two years. The World Bank's Robert Zoellickcalls for freer markets, but researchers at, er, the World Bank found that it's government spending that helps most.

 

Free market policies such as cutting import tariffs on food can sometimes help to lower the price in urban areas. This helps but only, as urban Tunisians understand too well, if there are jobs and money with which to buy the food in the first place. Well-designed public-feeding and public works programmes are much better than free market policies at feeding people. But these programmes require government spending. They're inflationary.

 

Now that governments' great enemy is inflation, the policies that feed the hungry are precisely the ones under the knife in a global push for market-friendly austerity. India's home minister, P Chidambaram, recently admitted that he didn't "have all the tools to control food inflation". Although countries are scrambling to find ways of bridging the gaps, the great worry in 2011 is not only that inflation will eat away everyone's earnings through higher food prices, but that the institutions and policies that might ward off the worst effects will be hexed by the markets too.

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