1. Page 1 of 2
Economic Commentary
QNB Economics
economics@qnb.com.qa
August 24, 2014
Declining Food Prices Increase the Risk of Global Deflation
International food prices have been declining
in recent months, reflecting record harvests
and weak global demand. Declining food prices
have in turn contributed to lower inflation in
the Eurozone, the United Kingdom (UK) and
the United States (US). This trend, coupled
with a weak Eurozone recovery and mixed
economic data in the US, suggests that the risk
of global deflation remains high. As such, we
expect the European Central Bank (ECB), the
Bank of England and the Federal Reserve to
keep to record-low interest rates for an
extended period of time. Qatar’s policy rates
are likely to follow suit.
Since the peak in 2011, global food prices have
dropped significantly, largely in response to
recent bumper harvests. According to the
International Monetary Fund (IMF), maize
prices have fallen 41% since their peak in
2011. Over the same period, rice prices have
fallen nearly 31% and wheat prices have
declined 20%. These large declines are feeding
into lower food prices for consumers around
the world. While lower food prices would
normally be a good thing as they lower living
costs, this decline comes at a time when
inflation is already very low in advanced
economies and could turn inflation negative,
namely deflation. This is a cause of concern as
deflation increases the real value of
outstanding debts in the economy which can
in turn reduce the available income available
for consumption and lead to lower growth.
Looking ahead, the IMF is projecting a further
decline in global food prices (averaging -3.8%
in 2014-15) on record yields. The global food
production outlook continues to remain
favorable, with the supply of major grains and
oilseeds projected to surpass demand growth
for the next two years. Furthermore, China
expects increased production of corn and
wheat as a result of favorable weather while
global rice supplies continue to be plentiful.
IMF Global Food Price Inflation and
Eurozone, UK and US Headline Inflation
(% change, year-on-year)
Sources: Bloomberg, IMF and QNB Group analysis
For the global economy, lower food prices for
the next 18 months could mean a higher risk of
deflation. Food prices account for only 10%-
15% of the inflation basket in advanced
economies, but they can reach 30%-40% in
emerging markets and developing countries.
At the current juncture, Eurozone inflation has
fallen to its lowest level in July 2014 (0.4%
year-on-year) since the height of the financial
crisis in 2008-09, sliding further into what the
European Central Bank (ECB) has described as
a “danger zone”. UK inflation fell to 1.6% year-
on-year in July 2014 as a result of lower food
prices. Finally, US inflation fell to a five month
low of 2.0% year-on-year in July 2014. Overall,
-20.0
-10.0
0.0
10.0
20.0
30.0
40.0
50.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
2011 2012 2013 2014
US (Left Axis)
UK(Left Axis)
Eurozone (Left Axis)
IMF Global Food Price
Inflation(Right Axis)

2. Page 2 of 2
Economic Commentary
QNB Economics
economics@qnb.com.qa
August 24, 2014
global inflation is very low by historical
standards and heading lower.
In Qatar, whilst rising rents continue to push
up domestic inflation, this has been partly
offset by falling food prices. Food inflation in
Qatar peaked at an annual increase of 5.9% in
June 2011 and has since slowed to a negative
0.6% in June 2014. Since the country has
virtually no domestic food production, lower
international food prices are likely to continue
to push Qatar’s food prices lower for the
foreseeable future, albeit with a lag. This
means that Qatar’s inflation should remain
moderate at around 3.5% at least until the end
of 2015.
Historically low inflation in the EU, the UK and
the US is likely to mean that central banks will
keep interest rates at historic lows for a
prolonged period of time to avoid the risk of
deflation. Deflation could potentially halt the
already weak global recovery by reducing
consumption—something that central banks
cannot afford (see our Economic Commentary
dated August 10, 2014). A pause in tightening
monetary policy in the US would also have the
added benefit of bringing greater stability to
global financial markets, which have been
unraveled by the tapering of quantitative
easing since May 2013. Qatar’s interest rates
are likely to follow US policy rates, given the
peg to the US dollar.
Overall, the risk of global deflation remains
high as bumper harvests and a weak global
recovery have pushed down inflation to record
lows. This is likely to keep global interest rates
low for the foreseeable future.
Contacts
Joannes Mongardini
Head of Economics
Tel. (+974) 4453-4412
Rory Fyfe
Senior Economist
Tel. (+974) 4453-4643
Ehsan Khoman
Economist
Tel. (+974) 4453-4423
Hamda Al-Thani
Economist
Tel. (+974) 4453-4646
Ziad Daoud
Economist
Tel. (+974) 4453-4642
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