Economy

How Rising Food and Energy Prices Impact the Economy

How Rising Food and Energy Prices Impact the Economy

Since Russia’s invasion of Ukraine, the effects of energy supply disruptions are cascading across everything from food prices to electricity to consumer sentiment.

In response to soaring prices, many OECD countries are tapping into their strategic petroleum reserves. In fact, since March, the U.S. has sold a record one million barrels of oil per day from these reserves. This, among other factors, has led gasoline prices to fall more recently—yet deficits could follow into 2023, causing prices to increase.

With data from the World Bank, the above infographic charts energy shocks over the last half century and what this means for the global economy looking ahead.

Energy Price Shocks Since 1979

How does today’s energy price shock compare to previous spikes in real terms?

U.S.$/bbl Equivalent Crude Oil Natural Gas Coal
2022* $93 $170 $61
2008 $127 $100 $46
1979 $119 $72 $33

*2022 forecast

As the above table shows, the annual price of crude oil is forecasted to average $93 per barrel equivalent in 2022⁠. By comparison, during the 2008 and 1979 price shocks, crude oil averaged $127 and $119 per barrel, respectively.

What distinguishes the 2022 energy spike is that prices have soared across all fuels. Where price shocks were more or less isolated in the past, many countries such as Germany and the Netherlands are looking to coal to make up for oil supply disruptions. Meanwhile, European natural gas prices have hit record highs.

Food prices have also spiked. Driven by higher input costs across fuel, chemicals, and fertilizer, agriculture commodity prices are forecasted to rise 18% in 2022. Fertilizer prices alone could increase 70% in part due to Russia’s dominance of the global fertilizer market—exporting more than any country worldwide.

What are 3 Ripple Effects of Rising Energy Prices?

Oil feeds into nearly everything, from food to smartphones. In fact, the price of oil influences as much as 64% of food price movements.

How could energy and food shocks affect the world economy in the near future, and why is a lot riding on the price of oil?

1. Rising Global Inflation

In 2022, inflation became a global phenomenon—impacting 100% of advanced countries and 87% of emerging markets and developing economies analyzed by the World Bank.

Countries With Inflation Above Target 2019 2020 2021 Apr 2022
Emerging Markets and Developing Economies 20% 20% 55% 87%
Advanced Economies 9% 8% 67% 100%

Sample includes 31 emerging markets and developing economies and 12 advanced economies

By contrast, roughly two-thirds of advanced economies and just over half of emerging markets experienced inflation above target in 2021.

This has contributed to tighter monetary conditions. The table below shows how rising inflation in the U.S. has corresponded with interest rate hikes since the 1980s:

Date Core CPI at Beginning of Cycle Magnitude of Rate Hikes
Over Course of Tightening Cycle
1979-81 9.3% 9.0 p.p
1983-84 4.6% 3.0 p.p
1986-89 3.6% 4.0 p.p
1994-95 2.8% 3.0 p.p
1999-00 2.0% 1.75 p.p
2004-06 1.9% 4.25 p.p.
2015-19 2.1% 2.25 p.p
2022-23 6.4% 2.75 p.p

2023 is an estimate based on market expectations of the level of the Fed Funds rate in mid-2023. U.S. Core CPI for 2023 based on latest data available.

In many cases, when the U.S. has rapidly tightened monetary policy in response to price pressures, emerging markets and developing economies have experienced financial crises amid higher borrowing costs.

2. Slower Global Growth

Energy price shocks could add greater headwinds to global growth prospects:

Global Growth Scenarios 2021 2022 2023
Baseline 5.7% 2.9% 3.0%
Including Fed tightening 2.6% 2.4%
Including Energy price spike 2.2% 1.6%
Including China COVID-19 2.1% 1.5%

Together, price spikes, hawkish monetary policy, and COVID-19 lockdowns in China could negatively impact global growth.

3. Rising Food Insecurity and Social Unrest

Even before the energy price shock of 2022, global food insecurity was increasing due to COVID-19 and mounting inflationary pressures.

Number of People in Acute Food Insecurity 2020 2021
Sub-Saharan Africa 97M 119M
Middle East and North Africa 30M 32M
South Asia 16M 29M
Latin America and the Caribbean 12M 13M

Sustained food shortages and high food prices could send millions into acute food insecurity.

In addition, high fuel and food prices are often correlated with mass protests, political violence, and riots. While Sri Lanka and Peru have already begun to see heightened riots, Turkey and Egypt are also at risk for social unrest as the cost of living accelerates and food insecurity worsens.

Global Challenges

Since World War II, oil price shocks have been a major constraint on economic growth. As the war in Ukraine continues, the outlook for today’s energy market is far from clear as a number of geopolitical factors could sway oil price movements and its corresponding effects.

Leave a Comment