Thursday, 5 March 2009

It's A Bit Of A Puzzle

The question of inflation has been exercising my mind again. As I previously wrote, the pressures of the FEW (Food, Energy, and Water) are still driving the engine of inflation (see post). The good news is that petrol prices have stopped rising. Locally, they have stabilised at 87.9p per litre.

The bad news is that food prices seem to be racing ahead. A recent report in The Times informed us that, despite inflation falling, food prices are rising at an annual rate of 9% per annum (see article). This confirms what I am being told by those who go shopping, but contradicts what I am being told elsewhere. According to The Economist, food prices on the global markets have fallen by 6.4% in the past month, and by 34.9% in the past year (see source).

The obvious question that arises is how prices can be falling globally, and yet not be reflected at the point of sale. Some of the anomaly could be explained by currency movements (the Pound against both the US Dollar - in which most non-EU imports are priced - and the Euro - UK food prices are denominated in 'Green Euros' under the CAP). Whilst being sympathetic to this argument, one cannot but wonder if we are seeing another market failure in action.

The UK food market is dominated by an oligarchy of food giants, who have been accused of price fixing for years. Their profits have steadily risen for years against a backdrop of falling farm incomes. Is this how the food element of the Age of Scarcity will work itself out?

1 comment:

Jack Miller said...

You seem to miss that there are three sine waves that relate to inflation. Lets call them: bonds, stocks and commodities. Bonds and commodities are almost out of sync with one another. In other words when bonds hit a peak, commodities are close to a bottom. Another thing you seem to miss is that money is a commodity. The price of money, the short term interest rate, provides a double whammy to the inflation rate on both the way up and the way down. Obviously, if the price of money is very low, like it is now, then by definition, the inflation rate on money is very low, but more importantly, the price of everything else is ultimately lowered by a lower cost of money. There is a lag effect and that is part of what is confusing you. The "raw material price" including everything from the price of oil and copper to the price of money has fallen dramatically. An inflation gauge that captures this drop is showing lower inflation. However, it took a while for the lower cost of raw materials to feed through. China is, in effect, once again "exporting inflation" by selling manufactured goods at lower prices. All of this is natural at a point in time in the business cycle when there is an excess capacity to produce goods. What we currently have is "too many goods, being chased by too few dollars" which is the exact opposite of inflation.