Sunday, April 20, 2014

"Too much money chasing too few dinners". Food prices are not rising because of Monetary Policy. Think Supply and Demand fundamentals instead

The prices of wide swaths of food items have increased over a relatively short period of time.  The longer term trend in rising prices has been the increased demand from developing countries, China being the most notable.  As disposable incomes increase people (1) consume more food overall and (2) become more diverse in what they consume (more meat and a variety of veggies along with grains already consumed).

When quantity demanded is greater than quantity supplied, over time prices inevitably rise.

Short term variables, like weather and disease (plant and animal), affect harvests and the stockyards in the interim.  This combination seems to be prevailing force behind the rise in prices at the grocery store.

One distinction I would like to make is "food inflation" is not a product of Monetary policy and the excessive "printing of money".  It is a product of market fundamentals mentioned above--the push (supply side) and pull (demand side) of Supply and Demand.

It is a scarcity of output/production as opposed to an abundance of money that is the primary cause of rising food prices we have seen as of late.

Here is a list from USA Today of 10 food items that have increased in price in the short and long(er) term.

1. Bacon
> 4-yr. change: +53%
> 1-yr. change: +13%
> Current price: $5.55 per lb.

2. Ground Beef
> 4-yr. change: +35%
> 1-yr. change: +8%
> Current price: $4.13 per lb.

3. Oranges
> 4-yr. change: +35%
> 1-yr. change: +23%
> Current price: $1.21 per lb.

4. Coffee
> 4-yr. change: +31%
> 1-yr. change: -17%
> Current price: $5.00 per lb.

5. Peanut Butter
> 4-yr. change: +30%
> 1-yr. change: -2%
> Current price: $2.71 per lb.

6. Margarine
> 4-yr. change: +30%
> 1-yr. change: -1%
> Current price: $2.11 per lb.

7. Wine
> 4-yr. change: +25%
> 1-yr. change: +8%
> Current price: $10.75 per liter

8. Turkey
> 4-yr. change: +24%
> 1-yr. change: +9%
> Current price: $1.73 per lb.

9. Chicken
> 4-yr. change: +22%
> 1-yr. change: +5%
> Current price: $1.54 per lb.

10. Grapefruit
> 4-yr. change: +22%
> 1-yr. change: +6%
> Current price: $1.02 per lb.

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