A drought-fueled rally in soybeans, corn and wheat is raising fears of another round of food price inflation, posing an unwelcome complication for policymakers, particularly in emerging Asia, where higher consumer prices may hinder their ability to ease monetary policy.
Central banks in the developing economies such as China, where food comprises nearly a third of the overall consumer inflation basket, are at greatest risk.
Citigroup Emerging Market strategists recently pointed out that food price inflation is already starting to show up in the June consumer prices for countries within Eastern Europe, Middle East and Africa.
Within Central and Eastern Europe, Middle East and Africa, "several countries have reported their June CPI. Interestingly, in all of these countries, CPI picked up after months of slowdown and the upside surprise relative to consensus was caused pretty much entirely by higher food prices. The pickup occurred despite the recent large drop in energy prices," Citi strategists Wike Groenenberg, Luis Costa and Coura Fall wrote in a report on July 12.
"Agricultural prices had come down significantly over the past year and were a major force behind the slowdown in headline inflation. But this picture is changing," the report stated.
Citi said the size of the pickup in headline inflation in CEEMEA was between 0.2-0.5 percentage points in year-over-year terms compared with May. "We saw it in Czech Republic, Hungary, Romania and Turkey." South Africa releases inflation data this week. "We should be prepared for increases in headline CPI there also."
For Asia, the outlook may be less severe. Frederic Neumann, co-head of Asian economics at HSBC , said he's "fairly relaxed" about the inflation outlook in this region because the price of rice – a consumer staple in Asia – has remained relatively stable and oil prices have fallen 20 percent since May, offsetting the surge in grain prices.
Poor rains, however, and the impact on India's rice crop presents an upside risk for headline inflation for Asia's third-largest economy.
India's wholesale and consumer price inflation levels are way above the Reserve Bank of India's comfort lines, central bank Governor Duvvuri Subbarao said on Monday.
India's wholesale price index (WPI), the main inflation gauge, rose to a lower-than-expected annual 7.25 percent in June, its slowest rate since January, helped by moderation in fuel prices. The RBI's threshold level for inflation is around 5 percent, he said.
Though the threat of rising food inflation may threaten the policy outlook for India, it's not yet expected to distract other regional central banks, wrote Olivier Desbarres, Head of FX Strategy, Asia-Pacific ex-Japan and Koon Chow, Head of EM Strategy at Barclays Capital .
"EM policymakers' dovish stance suggests they will look through the risks to inflation from the recent increases in global grain prices," they wrote in a report on July 12. More easing is expected from the Bank of Korea after last week's surprise 25 basis point cut and Taiwan's central bank may cut borrowing costs in September, the strategists said.
"We expect policy-makers to look through temporary supply shocks given the disinflationary impact of slowing GDP and demand growth, even in countries such as Singapore where growth and inflation concerns probably carry equal weight."
A simultaneous increase in agricultural and oil prices as crude supplies tighten, would present "a bigger risk to our dovish view," they added.
To some extent, containing food price inflation is beyond the control of central bankers, Ajay Kapur, Head of Equity Strategy, Asia at Deutsche Bank argues.
"India wastes 30 percent of its stored food to rats, just to bad storage. Crop yields are much lower than Mexico or China," Kapur told CNBC's 'Squawk Box' on Tuesday. "This is a supply-side problem that needs to be sorted out (with) better transport, better distribution facilities, better storage. It really has little to do with the central bank. You need to raise your investment in the agricultural sector."
By CNBC's Sri Jegarajah