Let Them Eat Cake

The French do not live by bread alone. But when the average price of the iconic baguette topped €1 for the first time last month, consumers from Picardie to Provence shuddered with apprehension. The price of the omnipresent crisp, golden loaf seemed to epitomize the rising cost of living and the shortage of cash in consumers' pockets. "If people see the price of a baguette go up while their buying power is stagnant or going down, well, they complain a little," says baker Jean-Pierre Cohier, who supplies baguettes to the French presidential palace.

In fact, they're complaining a lot about French President Nicolas Sarkozy, who came to office last May with a vow to be "the purchasing-power president." Unfortunately for him, in France and much of the rest of the world the rapidly inflating price of food is creating a dark mood about the cost of living that even the famously energetic "omnipresident" Sarkozy can't dispel. Food inflation used to be seen as a problem mainly for developing countries; in the past year, as food inflation spiraled, there've been riots from China to Mexico. Now the bite, as it were, is being felt in the heart of Europe.

The issue may be arising first in France because the country spends so much of its income on eating—about 14 percent of total household spending, versus 7 percent in the United States. "The perception of inflation seen from the consumer side took off in August and since then is really skyrocketing," says Eric Chaney, who is Morgan Stanley's chief economist for Europe, "and the only rational reason for that perception is the rise in food prices."

The increases haven't been astronomical: 5 percent for fresh vegetables, 7 percent for fruit, 4 percent for bread, compared with the year before. But "when the price of milk and bread goes up, everybody sees it," says Chaney. "People talk about hyperinflation! That is extremely neurotic, but that's the way it is perceived."

The French aren't in the worst shape. Germany is suffering from what one tabloid called "inflation angst" with an overall rate of 3.3 percent in November. In France, it's projected at a more reasonable 1.5 percent. But the inflation is in precisely the products people cannot do without: fuel and food. The overall index looks so reasonable only because the cost of optional purchases like computers, televisions and other electronics dropped about 50 percent in three years.

It's one of the paradoxes of globalization. As Western consumption of Asian goods rises, so do incomes in China and India. That creates a demand for better food, and thus higher food prices. Meanwhile, crops in many of the world's "breadbaskets" have been affected by bad weather, so global yields are down. And then there's ethanol, which used up some 20 percent of the U.S. corn crop this year. "It was a huge harvest, so big that it was piling up in parking lots; there wasn't enough storage capacity," says Ben Senauer, former codirector of the Food Industry Center at the University of Minnesota. Yet prices kept going up.