Friday, June 22, 2007

Food Prices Increasing

The Big Picture calls it agflation. I think that's a really good title because it explains the concept very clearly and succinctly. The bottom line is food prices are in the news again:

May food prices rose 4.7% from a year earlier, according to the latest consumer price index. The cost of eating out rose only slightly less.

The Agriculture Department said consumer food prices will rise 3% to 4% this year, notably faster than last year's 2.3% gain.

Tighter world grain supplies on top of extra ethanol demand could send those numbers even higher.

That's straining some of the equilibrium in markets that are used to a little more wiggle room, analysts say.

"We could be adding to the mix a supply problem," said Darin Newsom, a commodities analyst at DTN in Omaha, Neb. "We could have both situations going on this summer where we have long-term demand change and the short-term supply problems. It could get very interesting over this summer until we get a better handle in late August or early September on what's actually been produced."

Yesterday we looked at the Goldman Sachs Agricultural index. Let's throw-up the long-term chart again to get an idea of what we're looking at.

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Short version -- this chart indicates agricultural prices are increasing and have been for the last 2.5 years.

Here's a chart of food prices from the St. Louis Federal Reserve's FRED system. Notice the recent spike in activity:

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If anything, this situation completely debunks the notion of looking only at core inflation.