What has happened to food and energy prices and inflation in 2014?

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So far in 2014 the disinflation drums have been beating loudly over all parts of the media, albeit that they often call it deflation. This has been most pronounced in the Euro area where the latest official consumer inflation reading is shown below.

Euro area  annual inflation was 0.5% in March 2014 , down from 0.7% in February. A year earlier the rate was 1.7%.

Not only is inflation in this area low but the annual rate has fallen by 1.2% over the past year. This is what has attracted the attention of the media although it forgets that the fall is in the past and that what really concerns us is whether it will fall further. Also presumably media pundits feel that paying higher prices caused by inflation is good for them which is an odd thing to say. It is of course governments (and central banks) with their high debt burdens which are pushing the line that low inflation is bad and dangerous which it is for them!

Of course the Euro area is not the only place where consumer inflation has dipped. Even the UK has seen inflation fall below its 2% target. Indeed if we move across the world to China, at the beginning of the price chain, there is disinflationary pressure there too.

In March 2014, Producer Price Index (PPI) for manufactured goods decreased 2.3 percent year-on-year, and decreased 0.3 percent month-on-month. The purchasing price index for manufactured goods went down by 2.5 percent year-on-year, and went down by 0.2 percent month-on-month.

With the cut in some official reserve requirements for some rural banks announced by the People’s Bank of China today there is doubt as to how fast the economy there is growing. But even in a place where there were fears of overheating official consumer inflation is this.

In March, the consumer price index (CPI) went up by 2.4 percent year-on-year.

Food prices are rising

Tucked away in the detail of many inflation reports is the fact that the price of food has not seen disinflationary pressure and has continued to rise. For example we see this in the inflation data from China.

In March, food prices went up by 4.1 percent year-on-year, affecting nearly 1.35 percentage points increase in the overall price level.

Rather ironically the main downwards influence on an annual basis was the price of pork where rises are feared due to increased Chinese demand. However higher food prices have been found well beyond the borders of China. For example the UK even the British Retail Consortium which trumpets price disinflation as often as it can tells us this.

Food inflation slowed to 0.8% from 1.1% in February

Not much you might think but considerably more than the non-food sector where prices are according to the BRC falling at an annual rate of 3.2%.

Basic food prices

If we move to the commodities market we see that food prices have been rising strongly in 2014 so far. The Commodity Research Bureau produces a foodstuffs index which closed 2013 at 364.65 and closed yesterday at 440.39 for a rise of just under 21% so far this year. This gives a very different pattern to that of 2013 where food prices fell and we have regained that and some more  in 2014.

Those of you who have noticed rises in meat prices will gain some further food for thought from the behaviour of livestock commodity prices. This comprises these factors below.

  Hides, Hogs,  Lard, Steers, Tallow

In case you too were wondering what tallow is? It is beef or mutton fat and has uses from foodstuffs to soap although the cholesterol reading is through the roof! If we move back to the influence on inflation we see that the livestock index is up some 25% so far in 2014 and has in fact moved to record levels. It has dipped back by 1% since the peak where it nudged over 700 (700.3) on April 14th but this is a credit crunch peak exceeding the 656 of August 2011 and representing quite a surge on the initial credit crunch nadir of 267 in December 2008. This appear to be not the best of times to be a carnivore….

If we continue with the rising food price theme then the website 247 WallStreet compiled a list of the ten fastest rising food prices beginning with the humble grapefruit which is up by 22% over the past four years. The top three are below.

3. Oranges
> 4-yr. change: +35%
> 1-yr. change: +23%

2. Ground Beef
> 4-yr. change: +35%
> 1-yr. change: +8%

1. Bacon
> 4-yr. change: +53%
> 1-yr. change: +13%

I do not know about you but I cannot think of rising prices for OJ (Orange Juice) without thinking of Eddie Murphy and Dan Akroyd in the film Trading Places. But beneath this there is a message of rising food and particularly meat prices.

Mind you those who avoid meat via the Soybean or Soya bean route are having a hard time of it as well. From the NorthWestern.

Prices for soybeans and soybean meal hit all-time contract highs on Thursday, trading for $15.31 per bushel and $495 per metric ton, respectively.

Now “all time contract high” is indeed an oxymoron but even so we get the message.

The price of wheat which was falling has been given an upwards push by the problems surrounding the Ukraine. The situation is still volatile for obvious reasons but wheat prices are up 11% so far in 2014.

There are plenty of worries about food prices going forwards of which two seem the most powerful. Firstly we have the basic impact of a rising human population and secondly there does seem to be a genuine problem with the Bee population which sadly cannot be reversed by the impact of my window-boxes and dwarf Rhododendrons in pots!

Fuel Prices

This is the other side of the inflationary coin as fuel prices have been a disinflationary influence in recent times. This happened firstly by it stopping being an upwards influence on inflation and then it became a downwards push. If we look at the Euro area we see that has impacted there and was the biggest downwards influence.

while fuels for transport (-0.24%)

This has been repeated in the UK where the transport category was this.

Largest downward effect on the all items 12-month rate change

Some of the impact here has been caused by the fact that both the UK Pound and the Euro have been strong currencies in recent times. But if we look at the basic price of Brent crude oil we see that after the rises of late summer 2013 where it pushed above US $115 per barrel it has drifted lower. Even with the crisis in the Ukraine it has only nudged above US $109 and regular readers will be aware of the view expressed for a while now that it is like there is a strong magnet on the US $ 108 level. So the inflationary pressure has faded away somewhat.

However even here there are possible signs of change. Of course current events are an influence but natural gas prices in the United States have risen. The Henry Hub measure which seemed to have been pushed below US $4 by the fracking boom going as low as US $2 in early 2012 is now US $4.68.

Comment

My message today is that the media and central bank “deflation” campaign is backwards rather than forwards looking. Of course they actually mean disinflation. But to my mind the paranoia that is driving this debate has quite a few flaws. Firstly as you can see from food prices it is not true that inflation has disappeared and I note that a lot of the downwards pressure has come from fuel prices. Secondly a lot of the downwards pressure in the UK and Euro area has come from a strong currency. Thirdly the pattern for wages looks much more hopeful than it has been in quite a few countries which will in time impact on prices and inflation.

So there is my question for today, has the consensus view wrong-footed itself one more time?

How long is the Long Run?

This was defined by John Maynard Keynes thus.

In the long run we are all dead

Back in 2013 Manchester United Football Club had a go by giving David Moyes a six-year contract. We discovered this morning that eleven months are the new 6 years. Is the clock spinning faster these days? In the world of football it appears that the clock is on speed.

Meanwhile I guess Rafa Benitez will be pleased to note that Ryan Giggs will be interim manager.

This entry was posted in Commodities, Demographics, General Economics, Inflation, The US Economy, UK Inflation Prospects and Issues and tagged , , , , , , , . Bookmark the permalink.
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  • Anonymous

    Shaun,

    Low inflation and wage catchup all part of pre-election spin when reality is not much has changed and further devaluation or interest rate rise could upset this dream image!
    Any thoughts on Sweden – Krugman seems to suggest deflation(disinflation?) taking hold?

  • Forbin

    so why are the Banks so scared of dis-inflation ?

    surely if my wages are suffering from it ( and they are ) and over the past , what 5 years , we’ve already had 10% drop ( deflationary wages ? )

    then surely the prices of goods and services must drop or not be bought?

    the headlines really do worry me, esp. the media seem to think just because we have a one months figure thats low we’re all safe and dry ……. so the last 5 years was just an illusion ?

    for my own account since 2009 I’ve had to find another 28% to buy my food. ……. from a wage thats dropped 10%

    madness

    Forbin

    Damm might have to give up the popcorn just to buy a loaf of bread

  • Mike from Enfield

    Hi Forbin,
    I suppose inflation/disinflation raises different levels of concern depending on where you sit. If you live in the real economy then it is rather nice if prices stop rising to – maybe – give wages chance to catch up. A massively indebted government with no concerns beyond the next election would see things differently for obvious reasons. And if you are playing the casino economy then I don’t suppose it makes much difference as there are always pickings to be had. To them, maintaining money printing is probably more of a priority as – it would seem – it does not produce inflation outside of a few specific areas (e.g. the stock market and, by extension their profits, salaries and bonuses).

  • therrawbuzzin

    Good article Shaun.
    I don’t need to tell anyone where the impact that essential commodity inflation has, is felt most, especially if your benefits rise is capped at 1%.
    We’re all in it together.

  • just a thought

    Hi Shaun,

    I will not be surprise that for the end of this decade food stuff price will have double from the current level…

    https://www.youtube.com/watch?v=GvIT3cfffh0

    Food price the shocking truth…

  • Anonymous

    Very interesting, Shaun. In Canada, things are much as you
    describe in Britain, with food and energy prices sparking a jump in inflation, while the deep thinkers continue to worry about inflation being below target. In March, natural gas prices were up by 17.9% from March 2012, while in Alberta they were up by 81.5%. The way Alberta regulates natural gas prices makes prices in that province unusually volatile; just the same the natural gas market is tightening. The next biggest contributor to inflation was electricity prices, up by 5%, and continuing large increases in electricity prices seem to be a virtual certainty. Meat prices, which you highlighted in your column, were up by 3.4%; prices of fresh fruit (8.8%) and fresh vegetables (5.3%) showed even stronger increases.

    In the Bank of Canada press conference on April 16, Governor Poloz said: “I would remind you that inflation today [i.e. the February 2014 rate of 1.2%] is almost exactly what it was in January [i.e. the December 2013 rate of 1.1%], when we last put out an MPR (Monetary Policy
    Report).” This was a strange thing for him to say, since the very next
    day, Statistics Canada would report the March inflation rate shooting up to
    1.5%; the very MPR he was speaking about had also forecast an increase in inflation. The BoC had revised its much-too-low forecast of 1.0% inflation in 2014Q1 from January to 1.3%, consistent with a 1.4% inflation rate in March. The actual monthly inflation rate of 1.5% led to a 1.4% four-quarter increase for 2014Q1. If the BoC’s inflation forecasts for the rest of 2014 are as badly off on the low side as its forecast for the previous quarter, then the 2014Q2 inflation rate could already be at the 2.0% target rate. For the third and fourth quarters the inflation rate will be accelerating above the target rate. Andrew Baldwin

  • Jim M.

    No need to panic, Forbin old chap!

    Allow me to offer you a solution to that very conundrum!
    http://www.washingtonpost.com/pb/recipes/cheesy-popcorn-bread/13506/

    That’s Dairy, Popcorn and Bread.

    All the food groups in one tasty bite!

  • Anonymous

    Hi Chris

    It is an interesting outburst by Paul Krugman as he thinks this.

    “In Sweden they have extracted defeat from the jaws of victory, turning an economic success story into a tale of stagnation and deflation as far as the eye can see.”

    Whereas the Swedish government thinks this.

    “GDP growth in Sweden is expected to increase in 2014 and 2015 as a result of the stronger international outlook and increased confidence among Swedish businesses and households.”

    And ne’er the twain shall meet to coin a phrase.

    I last covered it back last May.and had my concerns as you can see below.

    http://www.mindfulmoney.co.uk/wp/shaun-richards/what-is-happening-to-the-economy-of-sweden/

    Since then the Europe/UK/US recovery has helped but disinflation has come back with the annual rate of CPI in March being -0.6%. I will take a closer look..

  • Anonymous

    Hi JIm M

    And we worry about an obesity crisis! It is somewhat symptomatic of these times that obesity and food poverty seem to be travelling hand in hand.

  • Noo2Economics

    Hi Shaun I find it very revealing that chinese food price inflation accounts for 35% of the total chinese inflation rate. This seems a good demonstration of just how “wealthy” the chinese have become as the sub contract manufacturer of the world.

    As to your question – isn’t it the case that inflation figures are always backwards looking?

    The best you can do is look for momentum indicators in the latest monthly and quarterly numbers although I’ve never heard the authorities doing that, even when inflation has been letting rip. This is probably because they don’t have any “experts” who know how to look for momentum indicators. For myself I am completely unperturbed by current inflation numbers as I know we can always rely on the good ol Government to introduce some more institutionalised inflation, for instance they could reinstate the fuel escalator or order the water authorities and Rail operators to increase prices even more or introduce more Green energy levies or how about a nice easy increase in VAT? There are a multitude of possibilities open to them.

    Then again, there is the whole issue of falling per capita productivity in the UK combining with increasing wage rises. The best they could do is absolutely nothing and let this dynamic take it’s course with the resultant inflationary effects, after all the GBP can’t keep going up forever can it?.

  • Tom

    I think there may be correction in food prices on its way. I remember food prices being significant on my parents budget when I was growing up, and the vegetable patch in the garden brought recognised financial gain.

    If you look at the change in food prices to wages over the last 25 years –

    http://www.inflationarypressure.com/food.php?inputa=Total%20Food&inputb=Average%20Earnings%20Index

    You can see wages have increased significantly faster than food but the trend is closing over the last 5 years.

    We have become used to cheap food and also used to spending our money elsewhere, but maybe we’re on journey back to where food prices should be.

  • therrawbuzzin

    If we’re going back to the old prices, can we go back to the old quality, from the old production methods?
    View the 40 year cost of a colour tv.

  • Anonymous

    Hi therrawbuzzin

    Inflation in the price of essential products always hits the poorest hardest. They are also the least likely to benefit from the current asset price inflation in houses and equities.

    As to falling energy prices Ed Davey has a plan to fix that apparently.

    “However, he added that the measures would add 2% to household energy bills by 2020,”

    http://www.bbc.co.uk/news/business-27121801

    Such estimates are usually to be found in the fiction section of the local library

  • Anonymous

    Hi Just a thought

    Thanks for the link. The matter that is particularly troubling is the decline of the Bee population (which is vital for pollination..). There was a good documentary on BBC 4 on it a while back and this report has now been released.

    http://sos-bees.org/reports/

  • Anonymous

    Hi Andrew

    I am afraid that central bankers are the new politicians! They too now scour events for something which can be quoted out of context to suit their case.

    If we move to a currency theme the commodity boom has boosted the Canadian $ which depressed inflation. But should we see a further dip in the Loonie ( a headline writers dream..) then Canada will be on a road to inflation that is very familiar in the UK.

  • Anonymous

    Hi Noo2

    I think that VAT has hit the Laffer curve so they will refrain from raising it for a while. However Ed Davey can be relied on to raise energy prices. From the Guardian.

    “The combined projects are expected to add 2% to an average household electricity bill by 2020, or £11 per household, but energy and climate secretary, Ed Davey, said the government’s “whole package” on energy reforms would ultimately lower consumer energy bills.”

    Ah yes, up is once again the new down!

  • Anonymous

    Hi Tom and welcome to my part of the blogosphere.

    I note on your chart that the rate of food price rises has accelerated in the credit crunch era when we are supposed to be poorer! Something is not quite right is it? Another rigged market perhaps…