The Complicated Nature of Today’s Inflation
The December C-FARE webinar focuses on the complexities of the inflationary period the U.S. is facing. Matthew MacLachlan, Michael Adjemian, and David Ortega will present an overview of their work on inflation as it relates to agriculture, food, and natural resources. Then C-FARE board member Jane Kolodinsky will pose several questions to the panel and each will have the opportunity to provide their insights into the complexity of inflation in 2022 and into the new year.
Michael Adjemian, Associate Professor in the Department of Agricultural & Applied Economics at the University of Georgia.
Food prices in the United States are high and rising. Following a trend that began during the COVID-pandemic and continues today, food prices are increasing at a faster pace than prices for other goods and services. The price of food is typically relatively more volatile for several reasons, including limited scope for food producers to adjust production capacity in the short run, so recent inflation readings are not entirely surprising; on several occasions since Great Recession, food price inflation exceeded inflation for other goods and services, as well. Over the long-term however, the price of food and other things Americans purchase trend in the same direction because the forces impacting them are the same. Recent food price increases, though, are reminiscent of increases observed in the 1970s.
Several factors contribute to observed food price inflation. On the supply side, Russia’s invasion of Ukraine affects the availability of important food staples (e.g., one-third of globally-traded wheat), fertilizers (Russia is the world’s largest exporter), and energy commodities. Follow-on policy shocks (e.g., India’s wheat export ban, Argentina’s reduced wheat export quota) similarly contribute. At the domestic level, Avian influenza had a large impact on the poultry industry. Supply chain disruptions due to the rising price of transportation and rising labor costs also play a role. Another potential supply side explanation people have offered is that food producers and other stakeholders in the supply chain using market power; however, this has yet to be empirically validated and begs the obvious question, “why would this only just be happening, now?”. On the demand side, the recovery from the pandemic downturn was much quicker than expected, and was aided by historic levels of monetary and fiscal stimuli. Several researchers have shown that the stimulus generally increased price levels in the United States.
David Ortega, food economist and Associate Professor in the Department of Agricultural, Food and Resource Economics at Michigan State University.
Grocery food prices increased approximately 12 percent in December 2022 compared to a year prior. There has been significant variation in price increases depending on the food product and the underlying factors behind the rise in prices.
Global events, particularly Russia’s invasion of Ukraine, have significantly impacted the food and energy industries, overall impacting consumer food prices. As of December 2022, the cost of wheat flour at the grocery store has gone up by 23 percent, bread prices by 16%, and margarine by 44 percent. (Generally, the ingredients in the products themselves do not make up a significant share of the cost increase. It is the transportation, processing, wholesale, and retail margins that make up a larger share of the overall increase in the cost of food.)
Another cause of the rise in specific food categories is the High Path Avian Influenza (bird flu) outbreak in the United States which has affected over 58 million birds. As a result, the price of eggs has increased by 60% over the past year. The bird flu has also affected, though to a lesser extent, the price of turkey and chicken.
Climate change and adverse weather in the United States and other agricultural producing regions of the world have led to decreases in yields and productivity and put upward pressure on prices. Farmers have faced extreme temperatures and weather conditions in the western United States. Abroad, Europe has faced heat waves, and China had one of its hottest and driest seasons in years. Lettuce has been particularly impacted by extreme temperatures and disease out west, with consumers seeing a 25 percent hike in prices since 2022.
Other food products’ prices are increasing at varying rates as well. Though starting to come down recently, potato prices increased by 13 percent over the past year. Coffee has increased in price by 16 percent. In contrast, beef prices have decreased by 3 percent due to farmers selling their livestock because of drought and high feed prices. However, beef prices are forecasted to increase in the next few years as supply begins to drop.
Demand-side factors have also impacted food prices. Even after accounting for inflation, increased consumer spending because of fiscal stimuli and excess savings accumulated during the pandemic have contributed to inflationary pressures. Rising food prices are also changing consumer food purchasing behavior. Consumers from primarily low-income households, which spend more of their income on food, are taking shorter and more frequent trips to the grocery store while bargain hunting and seeking out store-brand labels.
Matthew Maclachlan, research economist in the Food Markets branch of the Food Economics Division at the USDA, Economic Research Service.
The USDA is doing the following to address the increasing food consumer price index. In addition to forecasts, Economic Research Service (ERS) provides descriptions, visualizations, and analysis of recent trends in food prices. Trends of non-food goods and services provide context to evaluate changes in food and agricultural markets. ERS’s data shows that food prices are the third fastest growing Consumer Price Index (CPI) category since even before 2022. Housing and transportation are the first two highest CPI categories.
ERS’s Food Price Outlook (FPO) adds value to food CPIs and Producer Price Indices (PPIs) by forecasting and interpreting trends. ERS provides:
Data on food prices and forecasts annual food prices changes up to 18 months in the future
Forecasts based on U.S. Bureau of Labor Statistics CPI and PPI data
Monthly reports on 22 retail food categories (CPI) and 13 farm- or wholesale-level food or agricultural products (PPI)
Other FPO products provide information about U.S. food spending and the food price environment. Such products include:
Visualizations
Charts of Note, Charting the Essentials, and Amber Waves
ERS peer-reviewed reports
The USDA forecasts food prices to grow more slowly in 2023 than 2022 (though still faster than historical averages). Food prices were expected to increase more quickly in 2022 than in 2020 or 2021. In 2022, food at home prices increased more than food prices away from home. In 2023, the opposite will be true.
An overhaul of research methodology improved forecasts and processes behind the FPO. The legacy methodology predicted margins that are significantly more broad and less reliable than newer methodologies. The new methodology has allowed for reduced forecast error and informative prediction and process improvements. The FPO team works to provide information to other agencies about changes in food prices. Since late 2020, FPO has received requests for input from other agencies, Congress, OECD, FAO, and USDA leadership. The team also has a cooperative exchange with academics.
This program is supported in part by the Agricultural and Applied Economics Association and the US Department of Agriculture’s Economic Research Service, and the National Agricultural Statistics Service.
Those who register but cannot attend our webinar can always view a recording of it later at the council’s YouTube channel.