Causes of Increase in Price of Essentials in the Last Five Years

Topics: Inflation, Peak oil, 2007–2008 world food price crisis Pages: 9 (3037 words) Published: April 17, 2013
Term Paper Causes of increase in price of essentials in the last five years Department Of Economics
East West University

Submitted by:
Afia Ibnat Sajoti : 2012-2-31-118
Nusrat Jahan : 2012-3-30-
Date of submission:

Table of contents:
1.Abstract………………………………………………………………………………………………………………1 2.

Increases in price level are also referred to as inflation. Such price increases in an economy are usually due to the effect of macroeconomic factors like demand, supply and consumption. All other macroeconomic factors that affect increases in price level are somehow related to these three factors. Those other areas include interest rate, monetary policies and Gross Domestic Product (GDP). Since mid-2007 basic food prices have rocketed with disastrous consequences for poor consumers. The spike in international market prices through the first half of 2008 has now subsided. Still prices of rice, wheat, corn (maize), and edible oils remain well above the levels of just a year ago and are likely to remain elevated and volatile for years to come. Two separate dynamics need to be understood in order for countries to make necessary adjustments. A gradual rise in food prices has been under way since at least 2004 with three general and fundamental factors at work: rapid economic growth in the People’s Republic of China and India especially put upward pressure on prices as demand simply outpaced supply; a sustained decline in the United States dollar since mid-decade added to the pressures on dollar-denominated international market prices; and a combination of high and rising fuel prices coupled with legislative mandates to increase production of biofuels has established a firm link between petroleum prices and food prices. The causes of price spikes are crop-specific. Drought and disease in 2007 caused wheat prices to jump, and supplies of edible oil were reduced as farmers in the United States shifted acreage out of soybeans into corn for nonfood uses (ethanol). Rice is the clearest example of crop-specific causes—the price spike was driven by export bans that were aimed at helping contain domestic food price inflation in exporting countries, but had the unintended effect of setting off panic as supplies to the already thin world rice market were sharply reduced. Asia will need several years of good rice harvests in order to stabilize the situation and reduce the exposure of the poor to another shock in food prices. This will not be easy to achieve as input costs are driven higher by high energy prices. Thus, it seems unlikely that world food prices will return to the declining trend seen between the mid-1970s and the first few years of this century.

The world prices of wheat, coarse grains, rice and oilseed crops all nearly doubled between the 2005 and 2007 marketing years and continued rising in early 2008. These increases in agricultural commodity prices have been a significant factor driving up the cost of food and have led to a fuller awareness and a justifiably heightened concern about problems of food security and hunger, especially for developing countries. The causes of this price spike are complex and due to a combination of mutually reinforcing factors, including droughts in key grain-producing regions, low stocks for cereals and oilseeds, increased feedstock use in the production of biofuels, rapidly rising oil prices and a continuing devaluation of the US dollar, the currency in which indicator prices for these commodities are typically quoted. This turmoil in commodity markets has occurred against the backdrop of an unsettled global economy, which in turn appears to have contributed to a substantial increase in speculative interest in agricultural futures markets. Tight market conditions for essential agricultural commodities pose policy challenges for national governments as well as for international...
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