How Central Bankers Will Save Us from Rising Food Prices

En garde, Fellow Reckoner! We’re under attack!

Jean-Claude Trichet, head of the European Central Bank, has sounded the alarm.

“All central banks, in periods like this where you have inflationary threats that are coming from commodities, have to…be very careful that there are no second-round effects” on domestic prices, Mr. Trichet told The Wall Street Journal from his office overlooking Frankfurt’s financial district.

Can you believe it, Dear Comrade? If we are reading Mr. Trichet’s comments correctly, it would seem that the world’s food and energy communities are consciously rallying against us. Long thought to be soulless, mindless vegetables and minerals, commodities have apparently taken it upon themselves to “become” more expensive, to raise their own prices. We can almost hear the battle cries coming from the fields: Ears of corn unite!

Farmers are warned to sleep with one eye open lest an overzealous head of lettuce break ranks and attack under cover of darkness.

Mr. Trichet is busy marshalling the euro zone’s 17 member countries ahead of this weekend’s World Economic Forum in Davos, Switzerland. He’s encouraging them to strengthen “surveillance” of each other’s fiscal policies.

The fearless Frenchman noted that it is budget discipline that most benefits growth and job creation by “improving confidence of households, enterprises, investors and savers.”

Amazing! What would we do without the world’s central bankers, our frontline defense against self-inflating food prices? How would we know to save and invest if it were not for the battlefield cries of these intrepid, fiat fiddlers?

Waste…malinvestment…market distortions…worldwide food riots… There we go but for the grace of all-knowing central planners everywhere.

And yet, despite the best efforts of our monetarist saviors, food prices have been stubbornly rising across the planet. The Moscow News has the story:

Food prices shot up in the second half of the year following the summer’s global drought, and a similar catastrophe in 2011 could send the world towards disaster.

The average basket of food products rose 10.6 per cent, exceeding inflation, which reached 8.8 per cent.

But global food inflation reached 25 per cent year-on-year at the end of 2010 – up from its low of 7.5 per cent in June before the drought hit.

What’s going on here? How is it that an army of corn – up 94% since June, as Chris Mayer points out below – has outsmarted our finest academics?

Here’s a thought: Perhaps, as Milton Friedman so eloquently explained, inflation really is “always and everywhere a monetary phenomenon.”

True, in accepting this fringy position we’d also have to believe, as Friedman posited, that there’s “no such thing as a free lunch.” Crazy? Sure. But let’s allow our imagination to wander for just a moment…

Let’s say that, by inking trillions of dollars in new bills, central banks are actually causing inflation rather than raging against it.

What then?

Yes, yes… We know the “Bernankes” of the world are acting with our best interests at heart. We understand they know just which lever to pull and which knob to turn at precisely the right moment. But what if, somehow, they got it wrong? Would we see inflation leaking into the markets, pushing up prices at the pump and the grocery store?

What we need here is a recon mission. So tell us, Fellow Reckoner, what’s going on in your neighborhood? Are you noticing a price creep in your monthly bills? Could it be that inflation is already here, that it has infiltrated our defenses and lurks in our very midst?

Joel Bowman
for The Daily Reckoning