Monday, May 16, 2022

What Is The Worst Part Of The Current Inflation?

 In the US we may have seen the peak of overall inflation, with the annualized CPI rate increasing at 8.3% in April, down from 8.5% in March, the highest rare of increase in 40 years. The issue has become the reported top concern of the US public, according to polling, with the hot job market apparently not offsetting the concerns that have arisen due to the emergence of this high rare of inflation.

Many factors have been involved in bringing this about: supply chain problems arising from the Covid pandemic, fiscal and monetary stimulus especially last year responding to the pandemic recession, some exercising of corporate power, the presence of more tariffs enacted in recent years, and the invasion of Ukraine by Russia at the order of Putin, with this especially affecting energy and food prices. The latter two categories are what distinguish overall "headline" inflation from the more underlying "core" inflation, which also now also reflects some wage push elements as newly strengthened workers seek to try to make up for the inflation that has already occurred.

One particular item has gotten recentlyin the US, baby formula, a peculiarly egregious shortage. This has shot to the top of the headlines and moaning and wailing in the political sphere, with GOP politicians denouncing giving formula to immigrant babies in JUS government custody. As it is, this particular shortage seems to have some fairly clear causes, notably the closure of an Abbott Lab facility due to it producing toxic formula, a failure of past inspection.  The situation has been exacerbated by Trump administration's revision of NAFTA to USMCA, which included tightened restrictions on imported baby formula from Canada.  This situation may be about to resolve itself as the Abbott Lab facility is reportedly about to reopen, and the administration is apparently relaxing restrictions on formula imports from Mexico and Ireland, if not Canada apparently.

As it is, for American opinion the item that seems to get the most attention is retail gasoline prices, which indeed have reached a new all time nominal peak. While some on the Right have tried to blame much of this on Biden administration restrictions on oil production on public lands, it has relaxed most of those, with them mostly relevant for future production, not the immediate situation. The situation is clearly tied heavily to reductions in exports of oil from Russia, most of those imposed by outsiders as sanctions from nations not wanting Russian oil, even as much of it goes to other markets, although Russia itself cut off natural gas exports to Poland and Bulgaria.  

Compared to food prices, gasoline prices get more headline attention in the US, with US consumers spending on average 8 1/2 % of their income on gasoline, compared to only 6% on food on average. And gasoline prices have been moving up more sharply than food prices recently.

However, looking at the world at large, the more serious problem is food prices. This is because for poorer nations people pay much larger portions of their income on food than what we see in the US.  A recent estimate has global food prices rising on the order of 37%. This becomes a big deal even for a middle income nation like Egypt where the proportion of income spent on food is over a third.  This becomes much more serious when we look at actually poor nations such as Somalia, where the proportion of income spent on food rises to about a half.  Obviously an increase of food prices of anything like 37% in such places is a very big deal, with millions of people certainly going to suffer from malnutrition as a result.

And for the case of food it is not the outsiders sanctioning Russia that is the main source of the problem. It is Russia blockading Ukraine from exporting its substantial food production, and even damaging and blocking the actual food production itself. Reportedly 28 million tons of grain sit in warehouses in Ukraine unable to be exported, even though Ukraine's most important port, Odesa, remains under its control. But the Russian navy is blockading. The most important food items being blocked out of Ukraine are wheat, sunflower oil, and potash and nitrogenous fertliziers. It has provided 10% of wheat exports, 40% of sunflower oil exports, 17% of potash fertilizer exports, and 15% of nitrogenous fertilizer exports. 

The situation regarding wheat is especially dramatic, one of the world's most important food commodities. On top of this war situation, drought has hit wheat production in India hard, the world's second largest producer.  It has now banned exports. The upshot is that wheat prices have now reached an all time nominal high.  Both Egypt and Somalia consume large amounts of wheat, nearly all of which they obtain via imports.  It is the food situation that is the most damaging to the world at large from the current inflation, not energy or baby formula.

Barkley Rosser


Anonymous said...

Apparently, there is some lobbying going on with baby formula - 4 companies control 90% of mkt and they limit or prohibit foreign imports plus each state has to negotiate with a designated firm for WIC program purchases and Abbott has 2/3 of states under its contracts so when they went down there was not enough supply and there is a rule of exclusivity with WIC that WIC funds can only buy the state sponsored WIC firm supplies. Plus the idea that we would not feed babies that might be crossing the border is sad and that effort is a drop in the bucket.

Anonymous said...

President's get the credit for the economy when it is good and the blame when it is bad, but in reality they have few levers on economic performance - but the midterms will be brutal as we are notoriously shortsighted in our politics and in reviewing quarterly earnings.