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Look beyond inflation as the reason for price changes

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Strong pork prices partially due to inflation, partially due to strong consumer level demand.

A higher price is not inflation and is not even necessarily due to inflation. That statement runs against virtually everything you read these days. The popular press (and even the agricultural and meat industry press) is full of statements like "Gasoline prices inflated 14%" or "Inflation for beef was up 9.7%." Both statements are patently wrong and demonstrate a misunderstanding or disregard for the difference between price increases and inflation. Yes, those are not necessarily the same thing.

Inflation is defined as "a general increase in prices and a fall in the purchasing power of money." The key word here is "general." Inflation is not just the increase in the price of individual items, it is an increase in the prices of a broad array of items that causes the purchasing power of a dollar to erode. 

In my view, there is only one measure of the value of the dollar relative to consumer purchases: The Consumer Price Index for All Items. The CPI is an index that relates the prices of a large basket of items that consumers' normally purchase back to prices in a base time period. The current base is 1982-1984. So the July CPI for all items, not seasonally adjusted, of 296.276 says that the aggregate price of this basket of goods in July was 2.96276 times as high as it was, on average, during 1982-1984.  There is nothing magical about 1982-1984. It is just the time period currently being used by the Bureau of Labor Statistics, the agency that computes and publishes the CPI.

Another way to look at the July CPI of 296.276 is to say that the dollar in July was worth only 33.75% (1 divided by 2.96276) as much as it was in 1982-1984. It's just logical: If the same basket of goods costs 2.96276 times as much, one dollar is almost 67% less valuable than it was in the base period.

The inflation rate is the change of the CPI from one year to the next. July's 8.5% inflation rate is July's CPI of 296.276 divided by July 2021's CPI of 273.003. 

So, since the CPI measures the aggregate prices of this broad range of goods (for more detail than you ever really want, check it out here), it is a measure of the general price level in the economy and the purchasing power of a dollar. Changes in the CPI are thus a measure of inflation.

But what about individual items such as gasoline, food, meat, rent, etc?  Changes of prices of individual items are part of inflation but they aren't necessarily due to inflation. Sound like economist double-speak?  Well it is, sort of.

Consider the example dear to everyone' heart and pocketbook, gasoline:

  • Is gasoline at $3.956 per gallon (last week's national average) due to inflation? Not necessarily. Prices for individual items can vary with the changes having no connection to "inflation." Consider that the world has seen a huge disruption in energy markets with the war in Ukraine and subsequent sanctions against Russia. The U.S. gasoline market has been further complicated by limited refining capacity, at least partially due to policy decisions and regulations. $3.956 gasoline may well be just represent a price response to lower oil and gasoline supplies.
  • Does $3.956 per gallon gasoline contribute to inflation? Yes. The rise in gasoline prices would be one part of the "general increase in prices." By itself, a higher gasoline price would contribute to the inflation rate even if it is caused by supply disruptions

So, are high beef, pork and chicken prices due to inflation? That depends. Yes, more economist double-speak.

If the value of the dollar has changed, then some portion of a change in the retail pork price, for instance, should be attributable to that reduction in the value of the dollar. It is possible that "deflating" the current retail price will explain all of the change in the price of pork and we would therefore conclude that inflation was the reason for the higher price of pork. 

But what if the price of pork has risen by more than the inflation rate? Then we have to look at those old friends from Econ 101, Mr. Supply and Mr. Demand.

When considering retail prices relative to supply and demand, the relevant supply variable is per capita pork availability per person. That figure can only be calculated for months that we know pork production, changes in inventories and net trade. So, the most recent month for which we have complete data is June. June's calculated per capita availability was 4.16 pounds retail weight, 1.89% higher than last June''s 4.08 pounds. 

Note:  We use year-on-year comparisons each month to account for the seasonality of supply and demand. It makes no sense to compare November to June, for instance, because the two months have different seasonal factors impacting both production and consumer behavior.

Next we consider the change in real (or deflated – ie. removing any impact of inflation or the lower purchasing power of the dollar) retail price of pork. The nominal retail pork price, according to USDA's Economic Research Service, was $4.931 per pound in June. The deflated value in 1982-84 dollars was $1.664 per pound = $4.931/2.96276. The real (deflated) price is 0.54% lower than one year ago.

One conclusion is that pork prices in and of themselves rose but they rose less than the inflation rate. So, even though retail pork prices gained 8.47% from June 2021 to June 2022, they actually helped keep the inflation rate lower since they did not go up by as much as did the value of that broad basket of goods measured by the CPI.

The old rule of thumb is that a 1% change in supply would push retail price 1.5% in the opposite direction. Higher supply means lower price. That rule would say that July real pork price "should" have been 1.89 x 1.5 = 2.835% lower this year versus last year. Price, though, was only 0.54% lower so, even though price was lower this year, it were not as low as the supply shift and a constant level of demand would indicate. Therefore, demand this year was better than last during the month of June.

Another way to look at demand is to multiply per capita consumption by the real price of pork to get real per capita expenditures. This year's June value, again in 1982-84 dollars is $16.38. Last year's June value was $16.16 so RPCE was up 1.34% year-over-year, again showing higher demand.  RPCE for 2022 year-to-date is 6.9% higher than last year. 

The bottom line is that an observed price increase for an individual item may or may not be caused by inflation. The truth is that in times like these, both inflation and supply and demand are having some impact on virtually every price you see. But keen observers should always look beyond "inflation" as the reason for price changes. There may be much more than meets the unobserving eye – as it the case with pork. These strong prices are partially due to inflation and partially due to strong consumer level demand.

Source: Steve Meyer, who is solely responsible for the information provided, and wholly owns the information. Informa Business Media and all its subsidiaries are not responsible for any of the content contained in this information asset. The opinions of this writer are not necessarily those of Farm Progress/Informa.

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