Tame Inflation In Food Prices Continues, But For How Long?

Marking the 15th consecutive month, food price advances versus the prior year at the wholesale level exceeded those at retail, July saw the gap between the two narrow only slightly. The data comes from the Bureau of Labor Statistics Producer and Consumer Price Reports issued each month.

August 29, 2013

Marking the 15th consecutive month, food price advances versus the prior year at the wholesale level exceeded those at retail, July saw the gap between the two narrow only slightly. The data comes from the Bureau of Labor Statistics Producer and Consumer Price Reports issued each month.

Food Institute Chief Economist John Dunham, points out that:

“Inflation is difficult to predict, and can sneak up on an economy when least expected.  A bit deeper dive into the data suggests that these forecasts could be very conservative.  Another statistic, the Producer Price Index (or PPI), published by the Bureau of Labor Statistics, raises some very interesting questions about food price inflation.  The PPI shows price-level increases for raw commodities, intermediate goods, and finished products – in other words, for wheat, flour and bread.  At the finished product level, the PPI matches the USDA forecasts and shows inflation running 2.7% for food products.  Inflation for intermediate food products is 40% higher – running at 3.8% Most importantly, the PPI for raw food materials is running at 4.6%. 

“These numbers tell an important story.  As economic theory would suggest, loose monetary policy is causing the U.S. dollar to decline in value relative to the world price for commodities, leading to high commodity price inflation.  At the same time the weakness in the American economy means that workers and food manufacturers simply have no pricing power.  Therefore, they are reducing their wages and profits as a percentage of final consumer prices.  As the economy strengthens, workers and producers will begin to take more pricing actions suggesting that future food price inflation at the consumer level cannot remain tame.  While it is difficult to predict exactly when this will happen, it will occur quickly.”

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