Tags: Commodity | Prices | inflation | Oil

WSJ: Higher Commodity Prices Don’t Sway Inflation as Much as Higher Oil

By    |   Thursday, 26 Jul 2012 07:56 AM

Although the drought across the U.S. farming region has resulted in higher commodity prices, particularly for corn, wheat and soybeans, these price increases will not have a large affect on consumer inflation, The Wall Street Journal reported, and the impact will be much smaller than would be the impact from a similar increase in the price of oil.

The reason is because “food really isn’t ‘food,’” according to Paul Donovan, an economist with UBS. He noted that most of the food that is purchased in developing countries is processed and there are other factors that add to the final price. Therefore, the retail prices for food are not fully determined by farm prices.

For example, farmers receive approximately 50 percent of the retail price of butter and only 7 percent for baked goods, according to U.S. Department of Agriculture data cited by The Journal.

However, according to data from the Energy Information administration, 68 percent of the retail price of gasoline last year was influenced by the market price of crude oil, The Journal stated.

While price increases in agricultural commodity prices can take up to nine months to be reflected in grocery store prices, economists at Capital Economics said, an increase in the cost of oil is quickly reflected in higher prices at the pump.

The Capital Economics economist stated that any inflation impact because of higher agricultural commodity prices is small. They estimate that if the prices remain at current levels, consumer food inflation would increase from 2.7 percent in June to approximately 4.5 percent. However, the consumer food inflation is a small share of the tope-line consumer price index, the economists wrote, and the increase “would add just 0.3 percentage point to overall CPI inflation.”

A larger worry for increasing food prices is the potential affect on foreign wages, The Journal stated, as food accounts for a larger proportion of total inflation in emerging countries. Therefore, higher labor costs as a result of businesses in those countries having to pay higher cost-of-living pay increases for their employees might increase the prices of imports to the United States.

The USDA released a report today that showed U.S. consumers could pay 3 to 4 percent more for food in 2013 because of the higher commodity prices, Bloomberg reported.

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