London, Dec 7 - Stubbornly high food prices, an unwelcome variable for central banks, are expected to become a regular sticking point for policymakers grappling with unruly inflation pressures.
The cost of basic agricultural commodities from cereals to edible oils increasingly is grabbing the attention of investors and consumers, spiralling to multi-year peaks as volatile weather patterns shorten crop seasons and slash output.
The problem for banks is that rising food costs are muddying the waters as they try to navigate their way out of a financial storm caused by a credit market squeeze that started in August.
Wheat prices are the stand-out example of "agflation", more than doubling to record highs this year in the U.S. and Europe with crop pressures, robust exports, red-hot emerging market demand and the biofuels revolution serving as major drivers.
"We are asking crops to not only feed the world but fuel it as well. We feel that is going to be a very strong pillar of support for food prices," David Hart, senior research analyst at Fat Prophets, said.
The United Nations Food and Agriculture Organization said the global cost of importing foodstuffs could top $700 billion in 2007, the highest on record.
Rising food prices have materialised starkly for consumers and policymakers in developed and emerging economies.
Rioting erupted in several areas including West Africa, while soaring food prices in Russia could drive inflation above 11.5 percent this year even with retailers agreeing to freeze prices of eggs, bread, milk and sunflower oil until Jan 31.
On a broader basis, research from investment bank UBS showed food price inflation in the world's leading economies rose from around just 1 percent in 2005 to over 3 percent in early 2007, driven largely by rising soft commodity prices.
"A supply-related increase in food prices should push up headline inflation roughly in line with the weight of food in each country's CPI basket," UBS said.
INFLATION VS GROWTH
While food does not tend to account for the lion's share of overall CPI baskets, rising costs are creating a tense environment for policymakers trying to keep recession at bay.
"The issue of fast food price inflation and faster fuel price rises complicates the monetary policy analysis simply because it might result in central banks hesitating before they cut rates," Investec chief economist Philip Shaw said.
The U.S. Federal Reserve, reeling from global credit turmoil sparked by America's high-risk mortgage market meltdown, is seen cutting rates further from the current 4.5 percent.
Slowing growth proved compelling for the Bank of England on Thursday when it cut rates for the first time in 2 years to 5.5 percent to shore up the economy.
But the move was a close call, with some questioning the BoE's wisdom, given rising price pressures -- not least from food and fuel with oil still near record highs.
For the European Central Bank, inflation is still its top priority with ECB President Jean-Claude Trichet emphasising upside risks to price stability, including the possibility of further rises in oil and agricultural prices.
HEALTHY APPETITE?
In the midst of this year's market turmoil, key commodities have stayed strong as investors keep faith with a hyper-extended bull run to hedge against poor returns in other markets.
Hart said the urbanisation process in emerging market countries, namely economic powerhouse China, was a long-term factor adding to food price pressures in the medium to long term.
"The numbers are getting bigger and their diets are becoming richer. That is not something that is going to reverse itself," he said.
UK National Farmers Union chief economist Carmen Suarez said a possible solution to food supply constraints might lie with a technology still deemed unthinkable in some quarters -- Genetically Modified crops.
"The big question is will this potential increase in food prices change attitudes people have to GMO," she said.
"When people start to get hit in their pocket in terms of food prices going up, then people may start changing their attitudes."