Trichet and King: it’s energy, VAT, and food!
The global inflation picture is heating up. On Google, a search of ‘inflation’ spanning the month of February 2011 gets 311,000,000. For one year ago, the same search parameters yielded 1,850,000 hits. Inflation’s on the monetary policy makers’ minds. But why? In the developed world, it’s a food and energy story!
Seriously, look at German and US inflation since the 1960’s. Furthermore, check out core price pressures:
US 0.95% in January 2011…
…Germany 0.77% in January 2011
Dear Trichet, King, and part of the US FOMC: it’s energy and food….energy and food….energy and food…and VAT! David Beckworth writes a great piece about the merits of inflatin targeting.
Wheat, corn, soybean, and sugar prices have surged, whose price gains are now sitting very much on the back burner to oil prices. But look, wheat, soybean, and sugar price pressures are coming down. Therefore, food prices are showing signs of peaking. This should be taken into account when the ECB and BoE meet this week and next, especially if gas and fuel prices start to hinder economic growth prospects.
Some evidence:
* In the UK, price pressures are ever-present – the diffusion is much higher than in other European economies – but it’s very likely that prices peak. The economy’s been hit by a VAT hike twice in the last two years, and the depreciation of the nominal exchange rate continues to pass through to prices. Fiscal austerity will drag aggregate demand and prices – just hold on.
* In Germany, the domestic measure of consumer prices is expected to mark a 2.05% annual pace in February (1.96% in January), but the core level is growing a just a 0.77% annual rate (in January, which the latest available data point). For now, and probably throughout the rest of the year until union contracts reset on an aggregate level, it’s really all food and energy there.
* And in the US, core inflation is rising, but that’s primarily based on the re-emergence of the micro-pressures that are owner’s equivalent rent AND food and energy. Core inflation is now rising again (see recent Calculated Risk article), however, in my view, there’s not enough leading evidence to suggest that inflation expectations have in any way become unmoored. Unit labor costs, for example, remain submerged below a sea of economic profits (more on that tomorrow – but you can see a previous post on the subject here).
Watch monetary policy closely. The oil inflation may simply be the straw that breaks the camel’s back for some, since food prices have been headed north for some time. Key central banks shouldn’t hike – UK and ECB are notable examples – but they may.
I, consequently, still ‘hope’ that the recent hawkish rhetoric coming out of the ECB is simply a reflection of the hole that is the appointee to run the ECB after Trichet leaves in October. More bluntly put: they’ll say anything to get the job. (See Eurointelligence’s case for Mario Draghi.)
Rebecca Wilder
Rebecca,
I have little to add because you’ve said everything I would have said only better (especially your astute comment concerning Draghi). I’ll just point out that the VAT increases and surging commodity prices can be interpreted as a negative AS shock, and Quasimonetarists (I dislike the term but that seems to be what we have settled on) like Beckworth believe one should target nominal expenditures and totally ignore AS shocks (positive or negative). The BOE and the ECB are seemingly in the process of demonstrating why inflation rate targeting leads to large scale macroeconomic instability and consequently is a huge mistake.
P.S. I’m interested to see your post on ULC and profits. Those who have followed those numbers know we are witnessing the setting of new superlatives for the post WW II period.
Food perspective – (December to January and Year over year):
* Ground beef up 6.8 percent month over month, and 11.1 pct year over year.
* Butter, up 3.2 percent monthly and a stunning 27 percent over the past year.
* Coffee, up 6.5 percent and 16 percent.
* Potatoes, up 3.6 percent and 7.1 percent.
* Lettuce actually fell 5 percent monthly after a spike higher in December, but is up 5 percent over the past year.
* Bread up 1 percent and 3 percent.
* Chicken up 0.8 percent. and 4.3 percent .
* Egg prices have been fairly steady.
* Milk, down slightly month over month, but up 2 percent year over year.
Good news for wine:
Down 27.6 percent in the one-month period, and down 6.9 percent for the 12-month period.
Well done, Mcwop.
Thank you Mcwop for furthering the food inflation story – Japan, for example, is just food and energy inflation. January core inflation is -0.6! Deflation plus food and energy (non-discretionary) inflation; man, imagine what that’s going to do to consumer spending!
The way I see food and energy inflation is a ‘damned if you do’ story. Central banks that react to this kind of supply-side shock to prices doubly restrict demand when they hike rates in response to this kind of ‘bad’ inflation. That’s what happened in 2008 (along with other things, of course).
Michael Schuman has a good piece today at the Curious Capitalist today.
Rebecca
Of course poorer countries will notice tiny changes in food prices. The US not so much. Need to find rice and wheat prices.
Depending on grain and country rice up 5-15% this year. Thai rice up most
Since we talking about food, how has weather and climate created shortages impacted prices? I read about the drought in China and see figures projecting a third less from previous harvests. Not to mention floods and such elsewhere the last two years.
Mark Perry at Carpe Diem had a chart about a week ago on items coming down in price over last year. I couldn’t find it to link. There are problems with his list of manufactured items perhaps. I have problems too when there are rapid changes in technology that indicate (say a laptop) is cheaper because it is much more ‘powerful’ this year than last and the same price approx. I know why the methodology is used but when does it become moot…or does it in the macro level?
How much are commodities of the whole cost of producing items?
I do believe food, gas, and heating oil take a larger bite out of household income for those who have this as a major part of their expenses. In our family budget I would estimate a 25% increase in a basket of food items….a lot of prices have remained stable but there are reductions in quantity actually bought masked by packaging changes.
Gas of course has jumped almost 20 cents a gallon in the last two weeks and heating oil to almost $4/bbl which is a spike, but is oil staying higher this time round.
I think I will substitute wine for coffee from now on. Started today…hmmm, my writing has improved too. Thanks for the tip McWop. 🙂
No wonder people are very confused about the definition of inflation.
Actually this is another excellent post Rebecca.
http://moneywatch.bnet.com/economic-news/blog/maximum-utility/the-feds-hawkish-stance/1193/
Mark Thoma presents this reasoning
Big thing rdan is food prices are very relative to income level and locale. Current increases won’t be felt here, but in Egypt or Sudan small increases are devastating. It will affect us because of foreign instability.