Good afternoon from New Economy Brief.
As the US-Israel war in the Gulf continues to cause devastation for civilians across Iran and the wider region, its economic consequences are being felt increasingly keenly around the world.
This week we’re analysing what the war means for food prices, what policymakers could do to cushion the blow, and what the crisis teaches us about the consequences of fragile food systems.
Why the war is creating a food crisis
A compounding energy and fertiliser crisis. As attacks on energy infrastructure and drastically reduced oil shipments through the Strait of Hormuz push up energy prices, the impacts cascade along food supply chains that are deeply integrated with fossil fuels.
There are also unprecedented disruptions to supplies of fertiliser. As well as fossil fuels being a key feedstock for many fertilisers, around a third of global shipping of fertiliser passes through the Strait. These flows have all but halted since February. Gulf countries themselves are also major fertiliser exporters, and the conflict has hit some production facilities hard. This all adds up to rising prices and shortages for growers, at the key time in the year for sowing crops.
Concentrated markets amplify shocks. When just a few companies dominate industries that are a crucial link in global supply chains, shortages give them an opportunity to hike prices. Fertiliser is one such industry - so much so that the OECD have likened it to the oil industry. When the last energy shock reduced supplies, the profits of the nine biggest fertiliser companies quadrupled in just two years.
Catastrophic consequences for poorer countries. Farmers in many low-income economies will be unable to buy fertiliser at higher prices. This will mean food shortages that cause millions to suffer. African countries will be particularly badly affected, with many depending heavily on fertiliser imports, a large proportion of them direct from the Gulf. Meanwhile, farmers in Southeast Asia are suffering after China halted fertiliser exports in response to the war. The injustices built into the global economy are stark – in a bidding war over critical goods, poorer nations lose out.
In the UK, prices are set to rise. Though not as directly dependent on the Gulf as some countries, the UK still imports about 70% of its fertiliser, as well as around 40% of its food, whose costs will also increase with rising energy and fertiliser prices.
Industry body the Food and Drink Foundation estimates that the first month of the war alone has baked in food inflation reaching “at least” 9% by the end of 2026. At 10%, this could add £32.80 to the average household’s monthly food bill.
These impacts come after five years of continued food price inflation that has outpaced the rate of average price increases. This has been driven by repeated fossil fuel price shocks as well as the intensifying impacts of climate change and nature loss on agricultural production. And when costs rise for essential items, low-income households – one in five of which already face food insecurity – will be hit the hardest.
The political and economic fallout
In the UK, warnings of looming hikes to grocery bills are landing at the worst possible time. The cost of living crisis remains the top concern for voters heading to polls for this week’s local elections. Polling from IPPR before the war found the weekly food shop was second only to energy bills as a source of financial stress, and Which? found that over 4 in 5 people are concerned about rising food prices.
How will central banks respond? Though monetary policy cannot bring down energy and fertiliser prices, central bankers’ concern is that people come to expect price rises to continue, feeding into higher ‘inflation expectations’. The theory goes that workers will negotiate higher wages, and firms will respond by raising prices further. Food prices are key to this theory. Bank of England research has found they “matter significantly more for inflation expectations” than other spending, even including energy. Prior to the outbreak of war in Iran, central banks were gradually cutting interest rates as inflation slowly declined – but cuts have now paused, and hikes are a distinct possibility.
What can be done?
Rate cuts, not rises. UCL’s Josh Ryan-Collins argues that the Bank of England should “hold its nerve and continue on the path of lowering rates”. He says the weakened power of workers in today’s economy means there is “virtually no evidence” of a wage-price spiral driving inflation after the last crisis. Instead, lowering rates would reduce government borrowing costs, making it easier to take measures to target inflation at its source – like weaning us off fossil fuels by investing in clean energy and keeping prices under control through public ownership.
Crucially, the impacts of Global North rate hikes are not contained, but have global, unequal effects. When Global North central banks (particularly the US Federal Reserve) raise rates, the cost of Global South debt balloons, and Global South central banks are forced to follow suit to protect the value of their currencies. For countries already burdened by debt distress and facing food insecurity, the consequences would be severe.
Controlling price hikes. The government has some options in the short-term – such as pressuring supermarkets to keep prices low, or reforms to increase competition from budget retailers. Greece’s ‘household basket’ programme, which requires supermarkets to keep prices low and cap profit margins on over 50 essential items, has successfully lowered prices by up to 35% for some items – a useful example of how price caps on food could work in practice. The SNP have placed a similar scheme at the centre of their policy offer for this week’s Holyrood election.
But preventing firms in key parts of supply chains – like fertiliser – from unduly benefiting from shortages requires more international coordination to ensure measures are effective. That could look like coordinated windfall taxes to prevent profits shifting to elsewhere in the system, and in the long-term, building up buffer stocks that can be released into markets during crises to mitigate speculation driving prices higher.
Fixing our ‘Just in Time’ food system. Tim Lang, author of a major National Preparedness Commission report on the topic, says politicians need to “get real about food security” to address rising prices. That means investing in more domestic growing, more sustainable diets, national stocks of essentials, and a plan for rationing. The Autonomy Institute has proposed some creative options for publicly-supplied food, arguing that a basket of basic essentials should be provided to every UK household, along with subsidised ‘public diners’.
Crucially, actions to protect the poorest should be the most urgent global priority. As Adam Haneih has put it, the reality of famine facing global south countries “ought to weigh heavily on a world that has largely understood this war through the narrow lens of oil-price instability”. It is a sad reality that in times of crisis, if leaders do not ration fairly, markets will do it for us and the results will be far from fair.
Scottish elections and the just transition. Future Economy Scotland has evaluated how well Scotland’s main political parties’ manifestos deliver on Scotland’s just transition needs. The analysis shows a clear divide for the first time between parties committed to action on climate and nature, and those opposed to it. The authors place the Scottish Greens in the lead, but argue that no parties are fully reckoning with the scale of investment needed.
"Big Pharma Is Blackmailing the NHS". Global Justice Now’s Nick Dearden writes that the negotiation of the US-UK trade pact agreed by Keir Starmer and Donald Trump last May gave US pharmaceutical companies an opportunity to “blackmail the British government into stripping back its price control mechanisms”. In return for being spared tariffs, the UK agreed to lift the price cap on new medicines by a whopping 25%. This has doubled the proportion of UK GDP spent on new drugs, stretched NHS budgets past breaking point, and according to one expert, led to more UK excess deaths than Covid-19. Dearden argues for “publicly controlled medical research capacity” to reduce US pharma’s stranglehold on our medical system.
Independent Commission on monetary policy. In a briefing for MPs, the New Economics Foundation and Positive Money make the case for an ‘Independent Commission on monetary policy’. They argue that monetary policy has failed to deliver price stability in response to recent shocks, but that in trying to do so it has hindered much-needed investment and worsened the cost of living crisis. They call for a commission tasked to “examine our toolkit for managing inflation, and recommend reforms ahead of the next crisis”.
Roadmap for Eradicating Poverty Beyond Growth. In April, UN Special Rapporteur for Extreme Poverty Olivier De Schutter brought together UN agencies, governments, civil society organisations, trade unions, grassroots movements, and academics at a major conference to discuss development pathways “to discuss how poverty can be alleviated without relying on economic growth". The conference marked the launch of the ‘Roadmap for Eradicating Poverty Beyond Growth’, a suite of policy proposals seeking to “place human rights, care, and well-being at the centre of the economy, while respecting planetary boundaries”. It features policy proposals contributed by the Tax Justice Network, Positive Money, the New Economics Foundation and more.
Challenging the AI boom. A small handful of asset managers and tech firms have manufactured the race for investment in AI data centres, leaving us all to pay the environmental, social and financial costs, according to a new report from the Balanced Economy Project. It argues that highly concentrated industries in the AI supply chain, aligned with the world’s largest asset managers, have driven the data centre boom. By allowing a small number of firms and investors to monopolise the build out of data centres and tying their own systems to it, governments have handed them more power by becoming highly dependent on this system. The authors argue for measures to break up concentration, shine a light on data centre ownership, and stop approving large-scale data centres until the government has a handle on the problem.
