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As
much as I hate to rain on the deflation parade, I must point out that food
inflation is increasing worldwide. It seems that food prices are unaware that
they should be falling, because they are instead rising fast all around the
world.
For
example in India, after more than two months of steady decline, inflation has
risen for the second week in a row due to a spike in food prices. The
Economic Times reports that Indian inflation touches 5.64 pc with no respite
as prices rise .
(emphasis
mine)
NEW
DELHI: Costlier food items and a marginal increase in prices of decontrolled
fuels pushed up inflation for the second week running even as economists
stuck to their estimate of near zero inflation by the middle of 2009.
Government
data showed inflation for the week ended January 17 at 5.64% against 5.6% in
the previous week. The annual rate of year-on-year inflation was 4.45% in the
corresponding week last year.
RBC
News reports the same story in Russia, as inflation creeps up .
Russia's
inflation amounted to 0.8 percent between January 20 and 26, 2009, and 2
percent for the year to date (compared to 2.2 percent for the same period of
January 2008), the Federal State Statistics Service (Rosstat) reported today.
In January 2008 as a whole, the inflation rate stood at 2.3 percent.
The
rise in granulated sugar and tea prices contributed the most to the past
week's inflation, reaching 6.5 percent and 1.2 percent, respectively.
Meanwhile, prices for frozen fish, canned meat, rice, salt, and powdered baby
milk increased 0.5-0.7 percent, whereas egg prices fell 1.3 percent and
sunflower oil prices 0.8 percent. Fruit and vegetable prices rose 1.3 percent
on average, while car gasoline and diesel fuel prices edged down 0.7 percent.
In
Australia, Farm Online reports that fruit prices up 8pc, despite big CPI fall
.
Australian
retail fruit and vegetable prices rose by 8pc in the December quarter ,
standing out against the overall falling price trend, which has resulted in
the biggest slide in consumer prices (CPI) for 11 years.
Fruit
and vegetables received special mention among the Australian Bureau of
Statistics CPI figures for leading the few price rises, followed by takeaway
food, which increased by 1.5pc.
Fruit's
prominent role, especially, in leading the CPI statistics is likely to be to
stir vigorous comment from many Australian fruit growers.
Stone-fruit
growers recently have been claiming prices received for their fruit have
fallen below cost of production.
They've
been vocal in criticising the supermarkets for not paying enough for their
fruit.
In
South Africa, the Business Day reports that food remains a worry despite
falling CPIX .
Measured
by the target measure CPIX, consumer price inflation came in below market
expectations at 10,3% in December, down from 12,1% in November and the recent
peak of 13,6% in August. Transport inflation was sharply down, at only 2%
year on year, from 13,3%, because of further cuts in the petrol price, which
is now almost 50% down on its July peak. Food remains a worry, though. It
remained stubbornly high at nearly 17.1% in December , despite declining
international grain and other commodity prices.
In
Northern Ireland, the Belfast Telegraph reports that the food bills soar at
more than double the inflation rate .
Consumers
in Northern Ireland could find rising food bills an added challenge as the
recession starts to bite over the coming months.
New
figures provided by comparison website mySupermarket.co.uk reveal that the
cost of food is going up at more than twice the official rate of inflation.
The statistics show that the price of all food and drink products has risen
by 6.6% during the year to January 14.
They
also show even steeper price rises for staple food items — such as
bread, milk and cheese — with the cost of a basket of goods rising by
16% during the past year.
In
Canada, the Ottawa Citizen reports that consumers face higher costs despite
low inflation .
OTTAWA
— Canadian consumers — tens of thousands of whom have already
lost their jobs to the recession — may find this hard to swallow, but
despite headlines of falling interest rates and waning inflation, their
grocery bills and borrowing costs are in fact rising.
While
prices fell 0.7 per cent month-to-month and the annual inflation rate to 1.2
per cent in December — projected to fall below zero this year —
grocery prices were nine per cent higher than a year earlier , Statistics
Canada reported Friday.
"Inflation
is at a two-year low, but that's not the way it feels for those of us
shopping for groceries," said CIBC World Markets economist Krishen
Rangasamy. "As talk of generalized deflation is surfacing, prematurely
in our view, food prices continue to trend higher , with the depreciating
loonie boosting prices for fresh fruits, vegetables and other imports."
My
reaction: Despite the economic crisis and widespread deflation fears, world
food prices are rising. This major escalation in food prices calls to
question the conventional wisdom that inflation is not a problem.
1)
Rising food prices are likely to continue
There
is a misguided notion that lower demand, lower commodity costs, and deflation
will lead to lower prices. This is false:
A)
Falling demand only lowers prices when producers have room to cut prices . If
businesses have no profit margin with which to absorb lower prices, then
falling demand, instead of lowering prices, lowers the supply of goods by
forcing companies into bankruptcy. This is what is happening, as demonstrated
by Pilgrim's Pride Corp, the No. 1 US chicken producer, which declared
bankruptcy on December 1.
As
companies are forced out of business because of their inability to pass on
higher costs, the supply of goods is reduced and their surviving competitors
have room to raise prices. This can be seen in the rising price of chicken
wings in the wake of Pilgrim's Pride's Bankruptcy
B)
Companies didn't raise prices enough in 2008 to compensate for rising
manufacturing costs. While the commodity bubble was exploding, companies held
back on price increases to avoid losing customers, but now they must pass on
last year's increased costs to stay in business. Kellogg, for instance,
earlier this month announced plans to lift prices on three of its cereals in
the "low-to-mid single digit" range to help offset increased
production costs, and these price increases will likely be matched by
rivaling companies.
C)
Deflation fears are forcing up borrowing costs, which like commodity costs,
must be passed on to consumers. While the fed might have lowered interest
rates, banks aren't lending and companies face much higher financing cost.
The failure to pass on higher borrowing cost will lead to more bankruptcies
and less supply. Again, this reduced supply will allow surviving competitors
to raise prices.
Everyone
who is expecting deflation is ignoring this reality: companies can't sell
goods below their production costs and stay in business. Since the profit
margins of manufacturers at home and abroad were razor thin going into this
crisis, don't expect prices to drop. Expect companies to go bankrupt.
2)
Unlike last year's artificial inflation, today's rising prices are the real
thing
Last
year's inflation, especially the higher prices related to oil, was fake. When
oil hit 147 dollars a barrel, it didn't do so because of supply/demand
dynamics, but because of speculator dominated futures markets in the US .
Hedge funds, pension funds and, other investors piled blindly commodity
indexes and ETFs while knowing nothing of the fundamentals underlying the
commodities they were buying, or even WHICH commodities they were buying.
This enormous influx of dumb money created an impressive bubble and resulted
in artificially high inflation rates seen around the world last year.
Today's
worldwide food inflation is a far different story, because it is happening in
the face of widespread deflation fears . Consumers are delaying purchases.
Banks are hoarding cash (ie: most Chinese merchants aren't accepting credit
cards because banks are delaying payments ). Businesses are scaling back
expansions and reigning in spending. Yet, despite all these factors, food
prices are going up. Isn't that interesting?
It
also begs a very interesting question: if everyone, from individuals to
businesses, has scaled back their spending due to deflation fears, what
happens to already rising food prices when deflation fears go away?
3)
Rising worldwide food prices will quickly bring an end to today's deflation
fears
Rising
worldwide food inflation is surprising and puzzling economists. They don't
understand why it is happening (they didn't see the credit crisis or the
bursting commodity bubble coming either). Next month, as food inflation
continues to grow worse and consumers around the world start stockpiling
food, these economists will really start to worry, and, in about two months
time, with food inflation truly spiraling out of control, they start
panicking, their deflation predictions completely forgotten.
Conclusion:
The
US is not immune from rising food inflation: prices for food in US grocery
stores jumped 6.6% last year, the biggest spike since 1980. Even this
December, which saw gasoline prices fall by 17.2% (the biggest monthly
decline in 71 years), food costs refused to fall. If US food prices couldn't
muster a fall in December, five months after the commodity bubble burst and
deflation fears gripped the world, then they should not be expected to fall
at all.
Rising
worldwide food prices also have very negative implications for the dollar .
Many countries that are seeing rising food inflation do possess the means to
bring it under control: sell off their US reserves. Russia and India alone
have over 800 billion dollars they can sell to strengthen their currencies
and lower their food costs. So if food inflation keeps increasing, expect a
growing quantity of treasuries to be sold by central bankers desperate to
prevent starvation at home.
Finally,
the rise in world food prices increases the likelihood of out of control
inflation in China . Should China drop its dollar peg and start to sell its
immense US reserves to fight domestic hyperinflation, the dollar will likely
lose its reserve status and most of its value.
Buy
gold (and food).
Eric de Carbonnel
Market Skeptics
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