February 21, 2024 Written by Kofi Britwum – Assistant Professor of Farm Management ([email protected])
Whether you actively monitor the price of individual items during your grocery trips or not, you have likely noticed an increase in your overall grocery bill compared to what you paid for a similar basket of goods just a couple of years ago. The Bureau of Labor Statistics reports that food inflation surged by 23.5% between February 2020 and May 2023. However, these price hikes have not been limited to just food; other categories like housing, utilities, healthcare, and transportation also carry a higher price tag. In fact, consumer prices soared by 9.1% as of June 2022, marking the highest increase in four decades. So, how did we reach this point? Supply chain disruptions triggered by the pandemic account for some of these inflationary trends. Increased consumer demand after lockdowns were lifted coincided with floundering supply chains and labor shortages, limiting supply and driving prices upward. Relief packages implemented during the pandemic, as well as the conflict between Russia and Ukraine, exacerbated supply chain bottlenecks, impacting industries involved in trade with Russia and driving up prices of commodities such as wheat and fertilizer.
Economists utilize metrics such as the Consumer Price Index (CPI) and the Producer Price Index (PPI) to gauge inflation levels. The CPI captures inflation based on consumer prices, while the PPI does the same from a manufacturing or production standpoint. We tend to hear more about the CPI, but what does it entail? Essentially, it measures the overall cost of goods and services purchased by the average consumer, encompassing thousands of commonly bought items to form a representative basket.
Let’s use a simple example to further illustrate the concept of CPI. Suppose a typical consumer’s basket comprise 3 dozen eggs and 2lbs of ground beef. Assume the price of one dozen eggs was $1.00 in 2018, $1.50 in 2019, and $2.00 in 2020. For ground beef, let’s assume the price per pound was $3.50 in 2018, $4.50 in 2019, and $5.00 in 2020.
In 2018, the value of the basket would be (3 dozen eggs x $1/dozen) + (2lbs x $3.50/lb) = $10. The value of the basket in 2019 would be $13.5, and $16 in 2020. We have to designate one year as the base year, let’s say 2018. In the base year, the CPI is set at 100 (i.e., ($10/$10) x 100)). The CPI in 2019, relative to the base year is ($13.5/$10) x 100 = 135. In 2020, the CPI would be 160.
The percentage increase in CPI relative to the previous year (or time period) represents the inflation rate. In our hypothetical scenario, inflation rate for 2019 (relative to 2018) would be (135 – 100)/100, which is 35%. In 2020 (compared to 2019), inflation would be (160 – 135)/135, or 18.5%.
How does inflation affect American farmers? In several ways, actually. Farmers are both producers and consumers within their industry. They acquire various inputs like seeds, feed, fertilizer, fuel, utilities, equipment repair, and more. Consequently, rising prices lead to higher costs for these inputs, affecting their operations. Fertilizer prices in particular skyrocketed, with some farmers reporting a 300% increase in 2022 over the previous year. This implied utilizing fewer inputs or scaling back on important production practices. Moreover, inflationary pressures can lead to increases in commodity prices which may partially offset the high cost of farm production. However, this sets off a cycle where high commodity prices in turn increases demand for farm inputs. High commodity prices also make US exports less attractive, as foreign consumers require more dollars to purchase them. Amidst these price hikes, agricultural assets such as land appreciate in value. Whether this is advantageous or detrimental depends on whether the farmer owns or rents the land, with renters being more adversely affected. One of the Federal Reserve Board’s tools to combating inflation has been an increase in interest rates. However, for farmers, this translates to higher borrowing costs. Fortunately, inflation rates have been on a decline, dropping to 3.4% in 2023 from 6.5% in 2022, offering a more promising outlook compared to previous years.
