An additional concern is the potential effect of higher commodity prices on domestic inflation.
Although food prices have a smaller impact on terms of trade and the current account than do oil prices, effects on domestic inflation tend to be larger, because food accounts for a larger share in consumption than does energy.
This is especially true for developing countries. In the same fashion as a large share of the poor’s consumption basket consists of food products, food is also a relatively large share of total consumption in poor countries.
As a result, spikes in food prices tend to have a bigger impact on consumer priceinflation in developing countries than in high-income countries.
Since commodity prices began rising in 2003, the median inflation rate has increased significantly among developing countries, with a particularly sharp jump observed during the course of 2007 as food prices surged.
These inflationary pressures present a further challenge for macroeconomic policy in developing countries, as a notable part of their economic success over the past decade originated from policies that stabilized and then reduced inflation.
In some cases, price increases tied to international energy and food markets come to augment domestic and other international factors underlying inflation.
This is true among some oil-exporting economies and in several Central and Eastern European countries where large capital inflows have created rapid credit growth, as well as in a few countries in Latin America where loose monetary and fiscal policies have created shortages.
In part because of limited data, the correlation between international and domestic food prices for developing economies and the relationship between domestic food prices and overall inflation is difficult to detect.
Data for 23 mainly middle-income countries show that upturns in domestic food price indexes are almost universal, albeit by a factor of 5 to 10 times less than the surge in internationally traded food crops.
Almost without exception, food prices have been the dominant force pushing inflation up across developing countries.
Indeed, for most countries, the nonfood portion of consumer prices in 2007 decelerated relative to 2006.
This may be good news, as the recent two-year surge in food prices may give way to a degree of easing in the next years, and there are few signs to date that food prices have had substantial second-round effects.
Hence, central banks in most developing countries remain cautious, and many are in tightening mode.
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