durmus yılmaz : food prices and inflation speech by mr durmus yılmaz, governor of the central bank of the republic of turkey, at the central bank of argentina 2008 money and banking conference “ financial turbulence – impact on developed and emerging economies ”, buenos aires, 1 september 2008. * * * dear guests, it is a great pleasure and honor for me to address such a distinguished audience on the issue of “ food prices and inflation ”. the current level of food prices constitutes a major risk to households, in particular those living in developing countries. i ’ d like to thank the central bank of argentina to organize this conference and dedicate a special session on this issue at this juncture. dear guests, the second half of 2007 was not an easy period for central bankers – and so far 2008 has been even more challenging. we are currently facing significant inflationary pressures on a global scale due to record high increases in commodity prices. the surge in inflation rates has become a major challenge that threatens price stability in many countries. average inflation throughout the world has been rising rapidly. inflation in developed countries has reached its highest level of the last eighteen years. for the first time in many years, inflation figures of the developing countries are in two digit levels. moreover, the financial turbulence that has started in the second half of 2007 and the subsequent credit crunch are adversely affecting economic activities. growth rates have been slowed in many countries. some advanced economies are on the brink of recession. dear guests, this is not the first time the world had experienced supply shocks in commodities. but, these shocks were usually in energy prices and consequently, they had affected advanced economies more severely than the developing ones. the rise in food prices, on the other hand, has led to different repercussions. in comparison to the industrialized world, food expenditures in developing countries constitute a larger share in the basket of consumer prices. that is why increases in food prices typically lead to higher increases in the inflation rates of developing countries. food prices have been rising dramatically, particularly since mid - 2007. at one point, the inflation of wheat prices reached triple digits. similar levels were observed in corn, soybean, and rice prices. according to estimates of the international monetary fund, food inflation accounted for 44 percent of global inflation in 2007 – up from 27 percent in 2006. in asian countries, this figure reaches to 68 percent. food inflation is expected to contribute almost two thirds of increase in

but cannot credibly commit itself to this course. as a consequence, other economic agents expect the policy - maker to deviate from its stated intention and adjust their actions accordingly. the solution proposed in the economic literature to this type of problems is based largely on two elements : institutional frameworks setting out clearly defined objectives for key policy areas and the adoption of “ rule - type behaviour ” that consistently and predictably determines the response of policy - makers to specific circumstances. these elements increase the credibility of policy commitments, thereby allowing a policy - maker to steer expectations of other actors in line with its long - term intentions and overcoming the short - term bias resulting from the time inconsistency problem. both of these crucial elements are in place in the euro area as regards the single monetary policy. the treaty on the functioning of the european union establishes a strong institutional framework for monetary policy in the euro area based on central bank independence and a primary objective of price stability, as enshrined in articles 130 and 127, respectively. together with the prohibition of monetary financing of public debt, laid down in article 123, this framework provides an important safeguard against monetary policy being dominated by fiscal policy considerations. and the ecb ’ s monetary policy strategy, which builds on a comprehensive analysis of risks to price stability via its two pillars and is communicated to the general public in a regular and transparent manner, entails “ rule - type behaviour ” on the part of the ecb. these elements provide a framework which is geared towards the medium term and which counteracts short - term bias towards fine - tuning macroeconomic and financial developments. the current crisis has instead exposed severe shortcomings in the institutional architecture of emu as regards the areas of fiscal, structural and financial stability. these shortcomings have made it possible for national authorities to often pursue economic policies that finally led to strong negative externalities on the euro area as a whole. besides inducing a build - up of risks, this also indirectly affected the smooth functioning of emu by exacerbating heterogeneity between countries. in particular, misaligned budgetary policies, unsustainable wage developments and structural rigidities in product and labour markets, as observed in several countries, constitute a source of persistent inflation differentials within the currency union. these in turn represent also a challenge for monetary policy. as regards the origin of such institutional shortcomings, there are four factors that play a particularly prominent role : first, weakly enforced fiscal