What Is the Worst Part of the Current Inflation?
What Is The Worst Part Of The Current Inflation
In the US we may have seen the peak of overall inflation, with the annualized CPI rate increasing at 8.3% in April, down from 8.5% in March, the highest rate of increase in 40 years. The issue has become the reported top concern of the US public, according to polling, with the hot job market apparently not offsetting the concerns that have arisen due to the emergence of this high rate of inflation.
Many factors have been involved in bringing this about: supply chain problems arising from the Covid pandemic, fiscal and monetary stimulus especially last year responding to the pandemic recession, some exercising of corporate power, the presence of more tariffs enacted in recent years, and the invasion of Ukraine by Russia at the order of Putin, with this especially affecting energy and food prices. The latter two categories are what distinguish overall “headline” inflation from the more underlying “core” inflation, which also now also reflects some wage push elements as newly strengthened workers seek to try to make up for the inflation that has already occurred.
One particular item has gotten recently in the US, baby formula, a peculiarly egregious shortage. This has shot to the top of the headlines and moaning and wailing in the political sphere, with GOP politicians denouncing giving formula to immigrant babies in JUS government custody. As it is, this particular shortage seems to have some fairly clear causes, notably the closure of an Abbott Lab facility due to it producing toxic formula, and a failure of past inspection. The situation has been exacerbated by the Trump administration’s revision of NAFTA to USMCA, which included tightened restrictions on imported baby formula from Canada. This situation may be about to resolve itself as the Abbott Lab facility is reportedly about to reopen, and the administration is apparently relaxing restrictions on formula imports from Mexico and Ireland, if not Canada apparently.
As it is, in American opinion the item that seems to get the most attention is retail gasoline prices, which indeed have reached a new all-time nominal peak. While some on the Right have tried to blame much of this on the Biden administration’s restrictions on oil production on public lands, it has relaxed most of those, with them mostly relevant for future production, not the immediate situation. The situation is clearly tied heavily to reductions in exports of oil from Russia, most of those imposed by outsiders as sanctions from nations not wanting Russian oil, even as much of it goes to other markets, although Russia itself cut off natural gas exports to Poland and Bulgaria.
Compared to food prices, gasoline prices get more headline attention in the US, with US consumers spending on average 8 1/2 % of their income on gasoline, compared to only 6% on food on average. And gasoline prices have been moving up more sharply than food prices recently.
However, looking at the world at large, the more serious problem is food prices. This is because in poorer nations people pay much larger portions of their income on food than what we see in the US. A recent estimate has global food prices rising on the order of 37%. This becomes a big deal even for a middle-income nation like Egypt where the proportion of income spent on food is over a third. This becomes much more serious when we look at actually poor nations such as Somalia, where the proportion of income spent on food rises to about a half. Obviously an increase in food prices of anything like 37% in such places is a very big deal, with millions of people certainly going to suffer from malnutrition as a result.
And for the case of food, it is not the outsiders sanctioning Russia that is the main source of the problem. It is Russia blockading Ukraine from exporting its substantial food production, and even damaging and blocking the actual food production itself. Reportedly 28 million tons of grain sit in warehouses in Ukraine unable to be exported, even though Ukraine’s most important port, Odesa, remains under its control. But the Russian navy is blockading. The most important food items being blocked out of Ukraine are wheat, sunflower oil, potash and nitrogenous fertilizers. It has provided 10% of wheat exports, 40% of sunflower oil exports, 17% of potash fertilizer exports, and 15% of nitrogenous fertilizer exports.
The situation regarding wheat is especially dramatic, one of the world’s most important food commodities. On top of this war situation, drought has hit wheat production in India hard, the world’s second largest producer. It has now banned exports. The upshot is that wheat prices have now reached an all-time nominal high. Both Egypt and Somalia consume large amounts of wheat, nearly all of which they obtain via imports. It is the food situation that is the most damaging to the world at large from the current inflation, not energy or baby formula.
Wheat in the US was always an underpaid effort to grow. When someone went all in on wheat, the ag community would mock them because the inputs cost more than the grain co-op was willing to pay.
When we look at fertilizer, we shot our own selves in the foot. We hemmed and hawed over allowing private industry the opportunity to build fertilizer plants because of the political cloud surrounding oil and gas and the immense costs of starting such a facility. We would rather import from China and Russia and let them deal with the costs of production and the pollution.
Yes, we are quick to take up the media fringe story of immigrants in custody getting baby formula and citizens on WIC go without. The government is to blame for that because their award procedures allow for monopolies. Some would say they prefer it that way. We so quickly jump on the fringe without noticing the snake in the garden. Mexico produces a huge amount of food for us and is under cartel control on the brink of a third world collapse.
There are only 3 million acres farmed for direct to consumer food and most of those are in California that hasn’t seen rain in forever. Florida and Texas are right behind, potatoes from Idaho. We don’t have capacity to feed our own population. We import 14% of our rice, a staple crop. We grow a lot of wheat but import a large amount from Canada.
The US is a reactionary society. The reason China has done as well as they have is they have a plan. We wait for the disaster and then plan the comeback. I’m not old enough for rocking chair dystopian propoganda. We do need to be doing a better job of planning for our future and not focusing on the metaverse or whatever outrage piece is being floated in the media.
Food has been about 50-50 home grown and imported for a while now. Governing the Abbott Labs debacle is the FDA and USDA. They loosened regs on Abbott leading to this issue of contamination of baby formula. Listeria was a big issue at Oscar Mayer plants processing meat. Damn places promote bacteria no matter how chilled. I would guess Abbott was not as careful in cleaning equipment and promoting Good Manufacturing Practicing in production and storage.
Just some info.
There was also a BIG Money report out in substack that did some investigation into the state award program where one manufacturer would get awarded the WIC contract for four years (Abbot) and no other supplier could sell into that while that contract was in force. It’s either Abbot or Nestle. FDA and USDA, well I’ll stop there
That kind of fits what I know about food and medicines for federal awards. One thing which always comes out is the state knows better as to what it needs. However this does not guarantee manufacturing under USDA, FDA, and GMP rules and guidelines. If the state awards it, who governs and inspects it? One awarded manufacturer for a product is not unusual. We are not making hot dogs here.
It’s always about money. Whatever happened to the Anti-Trust laws?
I think the law has figured out ways to get around it. I do not believe it has as much to do with antitrust as it would contract laws, safety, and GMP. Typically, a manufacturer for a product has proven they have the capacity to make the product, a reserve capacity, and follow Good Manufacturing Processes besides USDA and FDA laws. There is no getting around the last two which is why they were shut down. They are given a certain amount of time to fix the issues. Michael said the state granted the contract. I think that is odd.
The data was state specific to California. I think you might be right. SNAP is a wholely USDA initiative, probably with state assistance for implementation. So the USDA might be the contractee. I haven’t dug any further than the article from Matthew Stoller
let me quickly address fuel prices, since as Barkley points out “US consumers spend on average 8 1/2 % of their income on gasoline“
the last major US oil refinery was completed in 1977 under Jimmy Carter, so construction must have started under Jerry Ford, and it was likely first permitted under Dick Nixon…
four major US refineries, of the type that could produce a full range of oil products, have been shut down since…Philadelphia Energy Solutions, the largest oil refinery and gasoline supplier on the East Coast, blew up in 2019 and was never replaced…so that put us in a pretty big hole even before Covid, Ukraine and the other problems now being cited…
‘I Had to Go Back’: Over 55, and Not Retired After All
NY Times – May 19