Yesterday we had news that the Consumer Price Index (CPI) for April rose by less than expected 0.2 percent. That lowered the year-over-year rise in consumer prices to 3.9 percent, down from 4 percent the prior month.”
“But picking apart the data we weren’t all that impressed.”
“For instance, thanks to a “seasonal adjustment” the CPI counted gasoline prices as having fallen 1.9 percent in the month. Excluding the seasonal adjustment, however, gas prices actually rose 5.6 percent in April. With gas prices having risen even further in May, next month’s CPI is likely to come in a bit hot.”
“Food prices, meanwhile, as measured by the government’s data collectors, staged their biggest one-month gain in a generation, climbing 0.9 percent in April. On a year-over-year basis the CPI says food prices have climbed just 5.1 percent in the past year. But let’s face it, a quick glance at your weekly grocery bill will likely tell you that the CPI number is understating real life conditions by a wide margin.”
“The government, and the Federal Reserve for that matter, may prefer (at least publicly) to ignore food costs (along with energy) when tallying inflation. Going forward, however, this key component to consumers’ budgets is only headed higher and will [be] increasingly hard to ignore.”
“Rising global incomes have led to improved diets, including greater meat consumption (which requires as much as 10 times more grains to produce than a vegetarian diet). In addition to increased consumption, global food stockpiles have dwindled due to drought and other adverse growing conditions in key producing areas. And then there’s the matter of rising energy costs.”
“Ethanol mandates in the U.S. will result in nearly a quarter of this year’s corn crop being used to produce fuel instead of food. With more acreage allocated for corn there is less available for other crops, thereby driving prices for those grains and cereals.”
“Ever more costly farming inputs are also driving food prices. Fertilizer prices have soared along with the natural gas used to produce the vital plant nourishment. In much of the world, farmers are opting to use less expensive fertilizer as a result. That in turn, will lead to lower crop yields, pushing market prices upwards.”
“We also have not witnessed a significant increase in plantings, despite the rise in prices farmers receive for their effort. In addition to the higher cost of fertilizer, seed, land rents, diesel fuel to operate equipment, even crop insurance have all risen, so farmer’s net profits aren’t exactly exploding contrary to popular belief. Indeed, in many cases steeper costs are more than offsetting the higher crop prices, so farmers have little or no incentive to add acreage.”