# **1. Introduction**

From 1974 to 2005 food prices on world markets fell by three quarters in real terms. Recent price increases have reversed this trend. Since April 2007, wheat prices have doubled and almost every crop (maize, milk, oilseeds, etc.) is at or near a peak in nominal terms. Rice prices tripled between January and April 2008. There are differing views on the relative importance of the main factors which have driven prices up. However there is a general consensus that a combination of policy decisions (export bans by key wheat and rice producers and the use of foodgrains to produce biofuels) and global market trends (higher energy prices, a depreciating dollar and increased foodgrain demand) have been the main causes (Mitchell 2008).

Rising world prices have different pass-through effects on domestic prices depending on import trade regimes, price controls and domestic market structures. While these pass-through effects vary considerably, it is clear that higher inflation has become a major socio-political issue and has led to social unrest across all continents (examples include Uzbekhistan, Mexico, Pakistan and Cameroon). There have been significant increases in food price inflation in 2007/08 ranging from the Kyrgyz Republic (32%) to Vietnam (26%) and Chile (16%). In countries from the West African Economic and Monetary Union where inflation has traditionally been low, several countries have experienced double digit inflation, with significantly higher increases in food prices. This higher inflation has led to concerns that poverty might increase substantially and rapidly in many countries (FAO 2007; World Bank 2008a). Recent analysis of the potential impact on the poor of higher food prices has confirmed these fears (e.g. Ivanic and Martin 2007)<sup>2</sup> . Beyond the immediate impact of higher food prices on the cost of the food purchased by households, there is evidence that higher overall inflation hurts the poor the most (Easterly and Fischer 2001; Ravallion and Datt 2002).

The current crisis could have long-term negative effects. If higher food prices lead to lower caloric intake and an increase in child malnutrition, this could have additional negative effects (e.g. Del Rosso 1999; Alderman et al. 2006). There is also evidence that when households are faced with large negative shocks, they may sell their productive assets such as seeds and livestock, thereby jeopardizing their future earnings prospects (Carter et al. 2004; Fafchamps et al. 1998; Jalan and Ravallion 2002; Lokshin and Ravallion 2000; see also World Bank 2008b for a discussion).

The policy responses which countries have used to address the current crisis are essentially three fold (Zaman et al. 2008). The first are “economy-wide” policies to stabilize domestic food prices that are clearly important since the ability of households to shift consumption patterns is especially limited for staple foods (Tyers and Anderson 1992). The second are social protection and human development

> 2 On the issue of the impact of changes in prices on the poor, there is a related literature focusing on the impact of trade reforms (see among others Chen and Ravallion, 2004; Hertel and Winters, 2006; Hertel et al., 2004).