Effects of Quantitative Easing on Food Prices - Research Paper Example

Effects of quantitative easing on food prices Introduction Quantitative easing refers to a form of policy enacted with the intention of making more money supply when discount or bank interest rate becomes ineffective. The government employs quantitative easing through the central bank where it buys more securities to solve economic crises. In most cases, the central bank tends to employ this form of policy in a situation where the interest rates do not show any probability of making the expected results. Use of quantitative easing is associated with various risks including having a fixed amount of various goods intended for sales. Eventually, this leads to inflation. This paper demonstrates the effects that come about because of employing quantitative easing on food prices. Rise in food prices One of the established effects of quantitative easing is that it results to a rise in food prices. The reason behind this fact is that quantitative easing entails making of more money in order to assist in solving the situation affecting the economy. However, making of more money contributes in undervaluing the present ones in the economy of a country. Therefore, the country tends to experience hyperinflation. The inflation results to a rise in various commodities. Some of these commodities include raw materials associated with the production of food. Rise in raw materials especially in the agricultural sector forces most of the producers to increase the selling price of their products. Eventually the final consumer ends-up buying food at a higher price than usual. In every financial year, food producers tend to look on when they can be able to make more profits from the price of their commodities. Therefore, the producers are forced to increase their prices with an aim of avoiding incurring losses when inflation occurs especially because of quantitative easing (Duncan 162). Rise in prices of agricultural commodities One of the main established effects of quantitative easing is that it causes inflation. Some of the outcomes associated with inflation include a rise in prices of commodities. Most prices of agricultural commodities rises because of the inflation (Duncan 162). Rise of agricultural commodities affects all farmers especially the small-scale ones. Most of the small-scale farmers stops farming because of rising prices of various agricultural commodities ending up reducing their production. When most of the small-scale farmers fail to produce more goods as expected, the price of food in the market rises. In some cases, most of the small-scale farmers’ stops enacting agricultural related activities because of farming difficulties due to rise in prices of commodities. This creates a high deficit on the farm products hence a rise in food prices. Rise in international prices of raw materials and agricultural products Apart from the small-scale farmers being affected by inflation because of quantitative easing, large-scale farmers also tend to experience the same effects. Apart from the above outlined examples, showing effects of inflation due to quantitative easing, inflation also causes a rise in the import price index. This means that various raw materials related to agriculture like farming inputs that include fertilizers tend to rise in their prices. Some of other imported agricultural inputs that tend to rise in their prices because of inflation include farming machines and chemicals. Moreover, some of the seeds imported from other countries rise in their costs due to inflation. Failure of farmers to access the inputs contributes to low production of food hence rise in their prices. High cost of inputs makes most of the farmers fail to buy much of the products contributing to a decline in their activities. A decline in farming activities means that the production of law materials will eventually be low. This contributes in making the prices of the produced food rise. Rise in cost of activities in food manufacturing industries There is established evidence that inflation cause rise in manufacturing cost of various products including food products. The rise of manufacturing cost is related to the rise of cost in raw materials that manufacturing companies use while enacting their activities. For example, rise in buying cost of maize for flour production contributes manufacturing companies to adjust their prices when selling their final products. Moreover, rise in petroleum prices also affects manufacturing companies in a direct way. For example, the manufacturing companies incur more costs while transporting the final products to the consumers (Duncan 162). This makes them adjust their prices further, where they increase prices on their products. Therefore, it is clear and evident that quantitative easing plays a significant role in causing an increase in food prices rises. Rise in the cost of food distributing services Inflation occurring because of quantitative easing affects most of the distributing services. For example, inflation causes a rise in the cost of energy. Most of the food distributing personnel uses energy power for preservation services. Therefore, the distributors tend to experience a rise in their operating costs because of the inflation. This makes them adjust their prices hence increasing the buying price of food on the consumers. Additional increase in prices that most of the distributors tend to experience relate to transportation services. Transportation costs increase because of a rise in petroleum costs (Duncan 162). Most of the distributors also tend to increase their after sale services because of the extra expenses they incur due to inflation. This contributes in making the cost of food rise. Conclusion The above information demonstrates that quantitative easing plays a key role in causing a rise in food prices. Inflation that emerges because of quantitative easing leads to a rise in various operating activities related to food production. This makes food prices rise when reaching the end consumers. Rise in raw materials in the agricultural sector is one of the effects of quantitative easing. The above-illustrated information indicates that the food chain that involves production to selling of the products experience an increase in rising of costs because of quantitative easing. The government through the central bank always has the obligation of making sure that quantitative easing does not occur in order to avoid a rise in food prices. Work Cited Duncan Richard. The New Depression: The Breakdown of the Paper Money Economy. New York: John Wiley & Sons, 2011. Print. Read More