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No need to hit ‘food inflation’ panic button

Corn plants struggle to survive in drought-stricken farm fields in Ferdinand, Indiana, July 24, 2012.

JOHN SOMMERS II/REUTERS

It's shaping up to be another buoyant session today in the agricultural commodity pits.

Corn, wheat and soybeans are adding to their spectacular gains over the past month that have seen the commodities rally between 50 per cent and 60 per cent due to the extremely dry conditions in the U.S.

Such a sharp rise in key foodstuffs, quite naturally, raises the question of more inflation down the road.

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But Capital Economics, one of the savvier economic forecasting firms on the street, is taking a sanguine view. The firm says the drought "is unlikely to have a major economic impact."

Even if food prices stay elevated, the firm estimates the impact on inflation will be a modest rise of 0.3 per cent.

Inflation is running at a 1.7 per cent clip, and the increase due to the drought, if it occurs, will leave inflation close to the U.S. Fed's 2 per cent target.

The drought will also reduce agricultural output, but the overall hit on the U.S. economy won't be great, even if the harvest really gets clobbered.

"Although the U.S. grows more corn than any other country and supplies half of the world's soybeans, the farming sector makes up only 1 per cent (or just over $130-billion) of America's GDP. Even in the extreme scenario in which U.S. farmers lost a quarter of their harvests to the drought, annual GDP growth would be just 0.25 per cent lower than otherwise," the firm says.

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About the Author
Investment Reporter

Martin Mittelstaedt has had a varied reporting career at the Globe and Mail, covering politics, the environment and business. He opened up the Globe's New York bureau for the Report on Business, and has also been on the banking and capital markets beats. He's written extensively on investing themes. More

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