Sunday, June 1, 2014

"Food Inflation" is on its way in 2014. But the reason for it is not what you may think it is.

"Food inflation" is likely on its way to the US, and the world for that matter.

When we here the word "inflation" the first thought is usually "too much money chasing too few goods (services)" and look to Monetary policy as the culprit. Maybe...but maybe not.  Sometimes the fundamentals of Supply and Demand in various markets are at play.

Here are data from the USDA ERS site that show the change in prices of the basic food groups for the past couple of years and projections for the remainder of this year.  Does not look encouraging at the checkout line.

If you go to the site they give a nice overview of the why prices in select categories are increasing.

The short story version is there seems to be a perfect storm of variables coming together to conspire to raise prices---weather and disease (plant and animal) working to limit or decrease supply on the Supply-Side. Demand from recovering developed economies (US, Europe) and emerging developing countries (China, India, etc) is putting upward pressure on the constrained food supply chain.
Source: USDA ERS
Here is one interesting point made in the USDA ERS analysis I think is important to understand as well.
Additionally, it appears as if supermarkets are maintaining minimal price inflation on packaged food products, possibly in an effort to keep prices competitive in light of rising cost pressures for most perishable items. Therefore, ERS has revised the forecast for sugar and sweets downward to 1 to 2 percent and for nonalcoholic beverages downward to 1.5 to 2.5 percent for 2014.
Competition serves to minimize, or at least soften, the REAL changes in prices of many goods at the actual point of purchase.

Grocery stores have to consider YOUR whole grocery basket of stuff you purchase when pricing their products AND what other stores are doing at the same time.  They may play a little "rob Peter to pay Paul" with the inventory.  In order to minimize the price increases of the perishable goods you see above, they will likely decrease prices of other non-perishable goods where they may have more pricing discretion.

So, market fundamentals are increasing the prices of many diverse individual food items at the same time, and competition between stores is working to minimize (albeit not stop) those price increases.

That is what I call a reasonable explanation.  Maybe not one that makes us happy, but more reasonable than the one I started out with.

It only took a little more work.   :)
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