Where did the inflation go?

Where did the inflation go?

09 February 2021 from Anna Svahn

The central bankers keep promising that we do not have to worry about inflation and therefore keeps interest rates low and continue with stimulus packages after stimulus packages. The Federal Reserve has even gone so far as to say that IF inflation rises slightly, it would be good, because it has been low for so long.

But with trillions of first dollars in the system, the question remains, where did inflation go? Is it really as low as CPI shows?

In December 2020, the CPI increased by 0.4%. At the same time, the FAO Food Price Index (FFPI), an index that measures global food prices, rose by just over 3%. We have not had time to see the CPI for January yet, but FFPI rose by 4.3% during the first month. However, these are figures that we can expect to see rise in the coming months, as the price of agricultural raw materials has started to really pick up since September and October last year.

As is well known, what primarily drives the price of raw materials is inflation. And that's exactly what's happening right now. In recent months, the focus has been on how strong the stock market has been despite high unemployment and continued concern about the pandemic, but one asset class that has fallen into oblivion is agricultural commodities.

In six months, the price of US Soybeans has risen by 59%. It may sound like a lot at first glance, but several factors suggest that the journey has only just begun. First, commodities leave a long bear market behind while other assets and prices have risen. As a result, as recently as last autumn, it was more expensive for American farmers to grow soybeans than they were paid per bushel. Between 2011-2018, the production cost of both soybeans and maize rose by more than 80%, while prices fell, and it is only now that the prices of raw materials are adjusted upside.

The price of maize has also risen sharply in recent months, more specifically around 70% in the last 6 months. Like soybeans, maize is mainly used to feed animals, but another major area of use is ethanol, where almost 30% of maize production goes. This means that if the price of oil rises, the demand for alternative energy increases, which pushes up the price of, for example, maize - but also sugar, which is also used in production.

However, the fact that higher oil prices lead to higher prices for maize and sugar also means that falling oil prices lead to falling prices for sugar and maize. We could see this when the price of sugar in March and April fell by more than 40% before bottoming out as a result of falling oil prices. After that, however, the price of sugar has recovered and is now trading 78% above the lowest price in April last year.

The answer to the question of where inflation has gone is thus that it is now visible in commodity prices, which has also begun to be seen in the food price index. It is becoming clear, even to those who have previously denied that we are facing an inflationary problem, that rising prices are on the doorstep, while unemployment is still rising after the pandemic. What we can expect now is thus slightly worse than high inflation, and is called stagflation.

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03/02/2023 11:37:52


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