Relative Price of Food

Paul Krugman provides a chart of the nominal price of good, that is, the PPI Index for Crude Foodstuffs and Feedstuff using this handy source:

This isn’t the first time we’ve had a worldwide surge in food prices. There was a huge price rise in 1972-1974 — bigger, in percentage terms, than the current spike … That price spike proved temporary — although it wreaked terrible havoc at the time (a million people may have died in the Bangladesh famine of 1974). In real terms, food got steadily cheaper over the next quarter century.

Since Paul mentioned the relative price of good, I decided to take the PPI for food relative to the PPI for all commodities. Our graphs show this ratio (index = 1 for 1982) for the 1969 to 1978 period as well as for the period from 1997 to today. The first graph shows the 1972-74 spike, which did prove temporary as the relative price returned to its 1969 level, which our graph shows to be around 1.2 per our choice of index. Our second graph starts off with the index near 0.9 confirming Paul’s statement that the relative price of good declined over time. Relative prices continued to decline almost reaching an index of 0.7 during the summer of 2000. Since then, relative prices have been rather volatile. In fact, our index for March 2008 is not as high as the index for the spring of 2004.

Then again – our graphs are relying on U.S. producer price indices, which may not be the most reliable means for capturing the relative price of good for other nations. But even if it were, the message is that any efficiency gains in the production of good since 1997 are not currently being reflected in the price to consumers.