Wednesday, May 4, 2011

Inflation in Food

Federal Reserve Bank in Dallas, via Mark Thoma:
Among the causes of the recent world food price surge are weather-related poor harvests of staple crops such as wheat and some coarse grains. Affected heavily by drought in Russia and excessive rains in Canada and Australia, world wheat production for the 2010–11 marketing period is on track for a decrease of 5 percent compared with the 2009–10 period. World production of coarse grains (corn, sorghum, barley, rye and oats) is on pace to fall 2.5 percent.[4] Export bans by some countries, increased stockpiling by others and higher input costs—especially for energy in the production of fertilizer—likely also contributed to diminished supplies of many agricultural commodities.[5]
A basic principle of economics is that decreased supply increases a good’s relative price—that is, its price in terms of the other enjoyable things one must sacrifice to acquire the good. The number of theater tickets or MP3 downloads or haircuts one must sacrifice in order to enjoy a steak dinner increase when the relative price of steak increases. So too, does the number of hours one must work—and forgo leisure—to obtain a given amount of steak.
This is true in a world where money is used to facilitate the exchange of goods and services and would be true in a world without money (and thus without monetary policy).
Over periods of a few years (and, of course, over longer horizons), central banks can exercise considerable control over the rate at which the prices of an economy’s goods and services rise or fall, in units of money. An important point, though, is that—with a few qualifications—monetary policy affects money prices for goods and services in general, not the terms at which goods and services exchange for one another.[6]
Monetary policy can slow the rate at which food prices (together with all other money prices) rise; it cannot make food—or any other particular good or service—more affordable in terms of other goods and services.
Also, it includes a chart with the food components of CPI, beer is one.

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