About QE, Onions and Cheese

QE (Quantitative Easing) has produced powerful side effects, the most conspicuous a sharp rise in asset prices. This, unfortunately, has not been constrained only to hard assets and commodities, but also to many other goods of daily use. Although QE was conceived to aid the developed world banking sector, thereby the markets, it has a perverse effect as it has been an effective medium to export inflation to the emerging markets. The consequences for the countries receiving the money, namely emerging markets, include a sharp rise in prices fuelling inequality and social unrest. There are several examples but we will focus our attention on the acute rise in food prices and not precisely oysters or caviar but on daily food staples.

Changes in consumer prices in fresh food staples in Germany in April 2017 / Source: AMI

In India, the price of onions (by far one of the most important foodstuffs in the Indian diet) rose more than 600% between 2011 and 2016. The Indian Cabinet held crisis meetings to discuss the rising price of onions: indeed the price of onions could spark social unrest and adverse electoral results in India. The price of chili peppers in Indonesia, in addition, rose more than 300% during 2016. Chilis are equivalent to milk in Southeast Asia and are commonly used to season meat and salads. Indonesia has transited from twice to up to five times meals with meat per week. This demand for more meat has sparked the acute increase in the price of chilis. The price of pork, the single most important foodstuff in China, rose almost 10% in January 2016. During the last quarter of 2015, it jumped more than 50%. And in 2016 it rose an additional 60%. In other words, from December 2014 till December 2016, pork prices rose more than 110%.

Source: Statistisches Bundesamt

But not only in emerging markets are foodstuffs getting increasingly expensive. In the industrialised world, dairies are reaching record prices as the cost of producing milk, cheese and butter are nearly the same as the price they can be charged. There is no fun in producing them anymore. The size of cattle herds in the US, Canada and Australia are at their lowest levels since 1953. While this could serve as an explanation, the fact is that since July 2014 butter prices have risen 83%.

More tellingly perhaps is the sharp increase in cattle rustling criminality. One could be tempted to circumscribe that crime to drought prone lands in Africa. The truth is this crime is making a come-back in countries like Switzerland and Germany. Cows are disappearing in the middle of the night in Brandenburg’s Potsdam, as well as in Texas and California. So now it seems it’s worthy to steal cattle as the price of beef goes up in our favourite restaurants.

But not all has been bad since QE started to flow. Even if prices of foodstuffs are rising, the good news is that some product prices have declined. As Fed’s Dudley regretfully remarked back in 2011, in reply to a question from the audience about the rise in food prices: “Today you can buy an iPad 2 that costs the same as an iPad 1 that is twice as powerful….You have to look at the prices of all things.” (Reuters)