Wishful thinking.
That’s a two-word summary of the pushback you’ll likely receive if you’re brave enough to suggest, in public, that inflation could abate sometime soon.
Cathie Wood, bless her heart, made what, under more normal circumstances, might’ve been an innocent observation on Wednesday, when she told Bloomberg’s Ed Ludlow that markdowns and discounting associated with bloated retailer inventories could help ease price pressures in the US.
On its face, Wood’s comment wasn’t particularly controversial. After all, discounts do mean lower prices. That’s what a discount is. But after 18 months of analysts, economists and policymakers insisting inflation relief was right around the corner when it wasn’t, any argument that says price pressures will recede imminently is greeted with something like scorn, no matter how ostensibly sound the reasoning. We’re in a “fool me once” environment — jaded to the point we’re unwilling to concede tautologies, like discounts being price reductions.
One problem with suggesting inflation has peaked is that a Russian strongman who produces a sizable chunk of the world’s energy is in the middle of a hostile takeover bid for a country that produces a lot of grain. In addition to natural gas and oil, the strongman also has grain, not to mention fertilizer and, as it happens, his accomplice has a fair amount of fertilizer too. A lot of the grain is trapped, a lot of the energy is contraband and the fertilizer is sanctioned. Add it all up and you get a crisis. There’s even talk of a “famine.”
Since plunging 12% in March of 2020 during the initial COVID panic, The Bloomberg Commodity Spot Index has posted gains every month except four (figure above). It touched a new all-time high earlier this week, and is on track for a massive annual jump. A subindex of spot energy prices has nearly doubled in 2022.
Unfortunately, there’s no way to know when, or even if, the situation will improve. If it does, it’s reasonable to suggest energy prices will fall relatively quickly, but what about food?
For emerging markets, this is an urgent concern. For poor countries, it’s life or death. I’ve been over that enough to dispel any notion that I’m somehow aloof. I mean, I am aloof. Just not to that. I’ve never been food insecure, but I remember my father putting groceries on his credit card. “We gotta eat,” he’d say. It could’ve been far worse. Parents in poor countries don’t have credit cards. And besides, you can’t buy what isn’t available.
For rich nations, there’s no chance of a literal famine (that comes 200 hundred years from now, when humans live out the first hour of Christopher Nolan’s Interstellar), but food insecurity among lower-income cohorts will increase and, critically for the broader economy, it’s very likely that Jerome Powell’s “normal economic people” will divert spending to food at the expense of discretionary purchases.
For the first time since the early 80s, both grocery and electricity prices are rising at a double-digit rate (figure above).
“Food demand is inelastic, meaning it doesn’t decrease much when the relative price of food climbs,” Morgan Stanley’s Seth Carpenter wrote, in a new note documenting the macro implications of rising food costs. “Whenever food prices increase, the share of income spent on food rises, leaving less disposable income for other consumption categories,” he added. “As a consequence, food price upswings can have broader effects to different consumption components, and might affect total consumption in a meaningful way.”
At the same time — and this is important — persistently elevated food costs could offset normalization in other CPI categories, keeping inflation elevated and thereby compelling policymakers to persist in rate hikes despite the distinct possibility that doing so could exacerbate Main Street’s woes by driving up the cost of the credit some households may need to finance more expensive necessities, all while doing nothing to address to source of the problem. Powell isn’t a farmer, and one assumes the Kremlin isn’t interested in his opinion on the war.
The figure (below) shows the rolling six-month change in global food prices as measured by the UN’s gauge.
Note that the spike in 2011 coincided with the Arab Spring.
Morgan Stanley analyzed the effects of food shocks using a dynamic statistical model to isolate supply-driven events. Part of their analysis entailed gauging the impact of such events on real PCE and inflation.
On the consumption side, durables are hit hardest, falling 5% four quarters after food prices surge. Overall, real PCE falls 1% (figure on the left, below).
Americans already harbor an extremely pessimistic view of buying conditions for durables. This suggests a sustained rise in food prices will exacerbate the situation.
Morgan’s analysis also showed that large, supply-driven food shocks have a “persistent” effect on CPI over the ensuing 12 months. “Inflation starts accelerating roughly two months after the initial shock, and the impulse finishes about seven or eight months after,” Carpenter wrote, adding that “both core and headline follow a similar path throughout the year, with lower rates for core.”
The median impact is far less acute for developed economies versus emerging markets. The median annual effect for EMs is 1.2pp and 1pp on headline and core inflation, respectively, while those figures are 0.6pp and 0.3pp for DMs. But, as the figure on the right (above) shows, it varies widely by country.
When considered in conjunction with the ongoing upward pressure on shelter inflation from the post-pandemic US housing boom, and the distinct possibility that energy prices will remain very elevated in what, for struggling families, will feel like perpetuity, it’s understandable that sundry “peak inflation” narratives are greeted with skeptical derision.
Earlier this week, UAE Energy Minister Suhail Al Mazrouei told a conference that oil prices are likely “nowhere near” peaking.
Food demand is inelastic. I mean, yeah, sure. Certainly if you’re on the verge of starvation in an EM country.
In developed economies, we could adjust our diets a bit, no? Like, less meat ought to ease the pressure on grains. Less wheat may mean trying more exotic staples? What about switching off some corn subsidies so some of the production revert to food rather than being fuel?
Basically, IDK but it seems to me we should be able to pull some levers both individually and collectively to ease the pain.
And, maybe, despite the grumbling, the reality is that people prefer to pay more for food and cut on discretionary items rather than think a bit more about their food consumption? And, as usual, we cannot count on anyone showing any solidarity for poor people in EM countries. SOP there is “screw’ em, God better be with them coz no one else will”.
My observation is that people in the US are essentially a bunch of babies, unable to adjust to conditions without throwing a tantrum. If gas is expensive, burn less gas. If food is expensive, eat less expensive food. It’s actually pretty simple. But if you think it’s your god-given right to grill filet mignon and to drive an F-250 80 miles a day. There’s going to be a problem.
Funny and accurate!
I’m rural – really rural as in dirt road rural – and my question is this: has the price of gas affected the drive-through at places like Starbucks, for instance?
Agree with Joey here. FredM, I am afraid you are over estimating the American people. They don’t like to cook and they certainly don’t want to eat less meat. Trust me, I made the mistake of farming organic veggies for the public.
hahaha. made me laugh!
This has all the makings of the old rubber band. It is going to stretch a lot, but eventually it is going to break. The standard deviation of oil prices I think is something in the range of $60 per barrell. You know, the longer oil stays up here, the more likely it is going to crack. It may be 2025 though and then we will be watching the second inauguration of Donald J Trump. Only partly kidding.
Joey is right on. Americans have got to get over several unrealistic fixed ideas. 1. Beyond our shores nobody cares about what happens to us unless we are handing them money. The globe is comprised of ~200 sovereign nations that have the same god-given rights we do, to do whatever they can to live the way they want to. We have no moral or legal right to intervene. We are just not in charge of the world and never will be. We are barely in charge of ourselves. 2. We are not now self-reliant and able to be isolated from the rest of the world and never will be. We have to cooperate with others or we will lose a great deal of our much vaunted standard of living. 3. The population of the world is rising inexorably but the supplies of energy and other consumable resources are limited. About 150 years ago the economist (actually a cleric) Robert Malthus is credited with figuring out what would happen to us under these circumstances. We people of earth proved him wrong in his time, but we are running out of ways to get around the inevitable relationship between population and resources. 4. Climate change is real. Most of us seem to think it’s some kind of theory we can just ignore because we really don’t want to change what we are doing. Tough crap. Climate change is real, no matter whose fault it is, and it is already starting to wreck our lives. Sea levels are rising. Coastline property is already disappearing. Heat in our farm belt is already starting to push food production north (when it gets to Canada it won’t be our food any more, it will be theirs, eh). Anyway, the water farmers suck out of the Ogallala Aquifer to water crops in the semi-arid states of Kansas, Nebraska, and Colorado is quickly running dry and will possibly be unusable by the 2030s in many areas. This source cannot be replenished in under 10,000 years. The Colorado river is going dry and that’s much of what waters food production in CA. Two-thirds of the Great Salt Lake, the beating heart of Utah, is now gone and salinity in the remaining part is quickly reaching levels that will destroy the eco-system of the lake and negatively affect the economy of the state, starting as early as next year. Lake Mead and Lake Powell, the west’s two biggest reservoirs, are quickly reaching low pool and threaten both water and power supplies in CA and NV. These all present existential threats to not only the US, but the rest of the world as well. 5. Our infrastructure is a disaster. This summer we will undoubtedly see rolling blackouts in CA, IN, TX and several other states. My sister moved to SOCAL a few years ago and already she’s had a half dozen blackouts and a fire evacuation and she lives on the edge of the desert where there’s no real vegetation. Our bridges are falling down, our water and sewer systems are already past their useful lives and parts are failing daily. We seem to think we can solve our energy problems with EVs. If the electricity for charging them came from Thor himself we might be ok, but sadly we have to make the needed juice. We still need to find ways to do that and build an electrical grid that works. 6. Not finally, but surely most critically, our country is getting stupider and more intractably political. Neither the GOP or the Libs are responsible for this mess we are in. All us selfish bastards are the reason. None of us escapes responsibility for all this and unless we stop spending so much time calling each other names, fighting over a bunch of stupid ideologies, and trying to decide which of us should be in charge of the rest of us, we are unlikely to see the turn of the century as a society, maybe even as a species. That’s not a theory! Sadly, it’s a fact and I personally don’t think we are even nearly up to the task of changing ourselves and our future. We’ve wasted the last half century ignoring our true situation and as it stands now the situation is way worse now.
Disclosure: my few friends have always thought I had a big mouth and they were probably right. But H is a speaker of the truth and deserves our respect for that. He speaks that truth so we can better understand our situation and decide how best to react. Nothing I have said is not true, whether we like it or not.
“Heat in our farm belt is already starting to push food production north (when it gets to Canada it won’t be our food any more, it will be theirs, eh).” The solution is staring us right in the face. We just have to invade Canada. Canadian Bacon may prove to be prophetic 🙂