Wednesday, November 3, 2010

Food prices and inflation

A couple weeks ago, Armstrong at the Mises Institute put out a tirade against "Helicopter Ben running his printing presses at full speed" causing 0.4% inflation. He then explained that people were not more concerned about this terrible inflation rate because "core" inflation -- everything but food and fuel -- had only gone up 0.1%. That's less than 2% a year, hardly massive inflation. Food and fuel had gone up by a little more than 0.5%.

Armstrong then made a point that was simultaneously off-base and insightful in another context. First, the off-base part. Inflation is not changes in relative prices. When the price of one group of commodities (like food) goes up relative to other prices, that isn't inflation. When the rise in food prices leads to a rise in wage prices and a rise in the price of everything, that is inflation, but it's still a one-time event. It's not ongoing, monetary inflation of the sort that would be caused by the Fed. If I have a pain in my chest, it could be a heart attack or it could be that someone punched me and as a doctor you have to look at the other symptoms to know which is the case. This is not inflation caused by the monetary authority.

The other point is exceptionally well made, however. Where people spend large amount of their income on food -- particularly poor people -- the rise in food and fuel prices matter a lot more to their well-being than core inflation. When food prices spiked in 07/08, what mattered for the world's poor was the rapid erosion of their purchasing power. The current, small spikes are not caused by Bernanke, but by Russian wildfires and predicted low US maize harvests. FAO is rather concerned about it.

The reason we separate inflation into food, fuel, and "core" is so we can look at the part that matters. If you're trying to judge whether Fed policy is excessively loose, core inflation is what you ought to look at and it says that inflation is below what the Fed is unofficially targeting. If you want to identify changes in welfare for the "average" person, you need to look at the total picture including food and fuel. For different income groups, you really ought to look at different commodity baskets that include the other resources available to the group. If the price of organic, farmers' market foods goes up, well-to-do Ithacans may spend less on food in total by buying more from WalMart (while wearing a bag over their heads... can't let my neighbors find out.) When the prices of food at WalMart go up, the less well off have few other alternatives.

This, incidentally, is one of the reasons that it is important to continue investments to help small farmers become more productive, as discussed by this year's World Food Prize winner Beckmann and Aid Thoughts' Dissanayake. A paper reassessing our success in raising smallholder, Sub-Saharan Africa agricultural productivity is here, recent FAO efforts are highlighted in Nicaragua and in Pakistan, India is considering replacing coconut harvesters with machines, and a discussion of Malawi beekeeping all make interesting case studies of the efforts underway.

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