Don't Worry About Food Price Inflation
Food commodity prices have soared in recent months; since August, corn and soybean prices have doubled. This price spike has raised concerns about food price inflation. Other commodities, most notably lumber, have also increased significantly in price. Then, last week we learned that US consumer prices rose more in the year to April 2021 than any 12 month period since 2008, further raising inflationary concerns.
The relatively large increase in the all-items CPI from April 2020 to April 2021 reflects the low value in April 2020 due to the COVID-19 pandemic. The all-items CPI dropped at the beginning of the pandemic because people stopped buying stuff and it has been increasing since that time. The rate of increase has picked up in the last two months, which is reasonable to expect as we exit the pandemic slowdown and demand picks up and supply bottlenecks work themselves out.
The food CPI jumped at the beginning of the pandemic and has increased little since that time. The increase was driven by food consumed at home (i.e., purchased in the grocery store), which increased by 5% in the early pandemic months and was back to trend by the fall. The initial price bump resulted from supply-chain issues and shortages as consumption moved from eating away from home to at home. Prior to 2020, food away from home increased at a much higher rate than food at home.
The recent increase in consumer food prices pales in comparison to the dramatic increase in corn and soybean prices. So, why has the boom in food commodity prices not translated into food price inflation?
The main reason is that most of the price of food is determined by the cost of processing, packaging and marketing. The USDA estimates that farm gate sales of food commodities made up 14% of the retail value of food in 2019. If farm prices were to double, we would expect food in the grocery store to increase by just 14%.
Another reason that corn and soybean price jumps don't flow directly to food prices is that most corn and soybeans go to feed animals or cars. Lean hog futures prices have increased along with corn and soybean prices. Live cattle futures have increased by only 20% over the same period, which is much more than food prices, but much less than the grains.
The lack of food-price response to the corn and soybean price jump is also consistent with earlier years. Agricultural commodity price booms in 2007-08 and 2011-14 also did not translate into food price inflation.
Even small food price increases can seriously affect low-income households. In a recent article in Choices, Jayson Lusk and Brandon McFadden report that the lowest-income quintile of households spend a third of their income on food, whereas households in the highest-income quintile spend just 7% of their income on food.
Over 90% of academic economists study topics other than the macroeconomy, including me. So, I won't weigh in on the general inflation outlook other than to note that the Federal Reserve has a lot of tools it can use to reign in inflation and it is paying attention.
But, on grocery store prices, I'm confident in saying that large price jumps are unlikely. Grocery store prices are more affected by factors down the supply chain than by farm prices, and 2020 showed us that even a massive supply-chain shock has minimal effects on grocery store prices. Grocery store spending increased by 50% and spending in restaurants and hotels dropped by 50%. Yet, we only saw a 5% increase in grocery store prices that lasted a few months. It is remarkable how quickly the food system responded to this shock relative to, say, bikes or microchips.
The R code to generate the figures in this article is available here.