The news is full of reports about huge increases in prices for corn, wheat, and soybeans, as a result of a simultaneous, severe drought in many of the world’s food-producing regions. Despite the dramatic headlines, the reality for U.S. consumers is that the food inflation they experience is likely to be much more tame. Indeed, the USDA projects a 2-3% increase in prices for fruits and veggies next year, with beef prices expected to rise a bit faster than that. At the same time, the broadest measure of U.S. inflation at the consumer level, the consumer price index (CPI), was running at less than a 2% annual rate through June (the latest period for which data are available).

This disconnect between rising prices for food commodities and comparatively modest inflation at the consumer level point up some important considerations about inflation.

Inflation: Two Types

We tend to think of inflation in terms of “cost push” and “demand pull.” Food inflation is an example of cost-push inflation—where increasing prices for commodities and other imports translate into higher costs for finished goods. But the transmission mechanism depends on the ability of manufacturers, distributors, wholesalers, and retailers to shift higher costs downstream. At present, the economic and competitive environment simply does not allow many companies to pass on higher food prices.

Demand-pull inflation tends to be the more “sticky” of the two, and results from increasing competition for scarce resources, workers, and finished products. But with economic growth modest and a large pool of unemployed workers, there’s little risk of demand-driven inflation at present.

Inflation Is a Global Phenomenon

Another important consideration about inflation is that the profound linkages in today’s global economy mean inflation is a global phenomenon that’s experienced locally. The reality is that consumers in emerging economies are likely to feel the bite of higher food prices, which make up a comparatively large portion of their expenditures, in a way that Americans simply do not. We shouldn’t underestimate the potential importance of significantly higher food prices overseas—we saw food riots in many parts of the globe in 2008, and higher prices for food are often cited as a contributing factor in the Arab Spring uprisings of 2011.

The relative importance of food expenditures in emerging and developed economies can be seen in part in how these countries account for inflation. For example, the U.S. CPI is 14% weighted toward food and beverage costs, versus around 30% for the comparable official measure of Chinese inflation.

Download a PDF of this post.

CRB^® BLS Foodstuffs Index
A subset of the Commodity Research Bureau’s Spot Market Price Index and measures the price movements of hogs, steers, lard, butter, soybean oil, cocoa, corn, Kansas City wheat, Minneapolis wheat, and sugar.

The opinions expressed are those of American Century Investments and are no guarantee of the future performance of any American Century Investments portfolio. This information is not intended to serve as investment advice; it is for educational purposes only.

(c) American Century Investments

www.americancentury.com