Despite March Drop From All Time High, Near Record Food Prices Predict Jump In Headline Inflation

The UN's Food and Agriculture Organization, whose January print was the catalyst for us to predict revolutionary food riots ahead of time, released its March food price update - "the Food Price Index (FFPI) averaged 230 points in March  2011, down  2.9 percent from its peak in February, but still 37 percent above March last year. International prices of oils and sugar contracted the most, followed by cereals. By contrast, dairy and meat prices were up." So in essence the drop in the volatile energy component has been transitory, courtesy of WTI and Brent now at 30 month high, and the April number will be yet another surge. Reuters agrees: "new increases are in sight as demand grows and supplies tighten, the UN Food and Agriculture Organisation said. Rising food prices have climbed to the top of the international political agenda after contributing to protests that toppled the rulers of Tunisia and Egypt earlier this year, with unrest spreading across North Africa and the Middle East." The spin: ""The decrease in the overall index this month brings some welcome respite from the steady increases seen over the last eight months," David Hallam, director of FAO's Trade and Market Division, said in a statement. "But it would be premature to conclude that this is a reversal of the upward trend," he said." It isn't. And with loose monetary policy expected out of the US for as wide as the eye can see, little if anything will change for a long time.

Here's why the April number will be another record:

 The March fall was largely driven by disruptions to major grain importers -- political unrest in North Africa and the Middle East and natural disaster in Japan -- while fundamentals of demand and supply have not improved, the FAO experts said.

"We believe that in the next few weeks, and there are already signs of it, prices will rebound," Concepcion Calpe, FAO's senior economist told Reuters in a telephone interview.

Political instability in North Africa and the Middle East, which affects grain import decisions in the area, would influence already volatile grain markets, while soaring oil prices would fuel further rises, the FAO said.

Brent crude traded around $122 a barrel on Thursday having hit a 2-1/2-year high above $123 the day before, driven by violence in the Middle East and North Africa, including Libya where rebels are fighting against the rule of Muammar Gaddafi. Brent started the year around $94 a barrel.

And regradless of whether prices go up much higher or not, a far more relevant issue is that, as John Lohman shows, the FAO index, which leads the CPI Food and Beverage index by 8 months, predicts some serious spillover into headline inflation over the next half year period. In summary: recent FAO prints predict a price acceleration to 4.8% Y/Y by November.