Grain Damage

Americans can see the impact of Russia's war in Ukraine and resulting Western sanctions every time they drive by a gas station. Many were also feeling the price rises well before armed conflict returned to Europe and roiled global commodity markets.

But the pain goes beyond the pump, and into the grocery store aisles. The data show prices of food and other staples are climbing at their fastest rates in memory, and that has broad implications, according to Barron's Lisa Beilfuss in last weekend's cover story.

Lisa wrote:

When you strip out everything but essentials—which is the opposite of what economists and policy makers do when they exclude food and energy prices to calculate so-called core inflation—the average change in those basic items rose more than 16% last month from a year earlier. In February from January alone, the month-over-month price change in those basics, including meat, bread, milk, shelter, gas, and utilities, rose 2.2%. For context, the Federal Reserve has long targeted a 2% annual inflation rate, which translates to a little less than 0.2% in month-over-month increases. Even then, some consumers say the price increases they are facing are far higher than what’s reflected in the consumer price index, a weighted average of goods and services across the country.

And the February data on grocery price inflation came before the war in Ukraine removed a large portion of the world's grain supply and sent oil prices soaring—affecting the cost of food packaging, transport, and refrigeration. Russia and Ukraine combined are responsible for about a quarter of the world’s wheat exports and a fifth of corn exports. It's unlikely that Ukrainian farmers living in a war zone will be able to plant anywhere close to their normal plans this spring.

Rising prices for groceries most hurt those at the bottom end of the income spectrum, who spend the greatest portion of their earnings on essentials. As a very visible form of inflation, they can also have a large impact on inflation expectations.

Here's Lisa again:

[Since the war in Ukraine began,] there is evidence of increased demand for food, says Boston College finance professor Francesco D’Acunto. Such sales are usually steady, meaning an increase signals that households are accumulating groceries in anticipation of further price increases and potential shortages.

Efforts by households to stockpile and pull forward spending is the very behavior economists and central bankers fear, given the self-fulfilling nature of inflation expectations and their crucial role in keeping overall prices stable. The idea: If consumers expect higher prices tomorrow, they will buy today and help ensure those higher future prices. Market-based measures of inflation expectations have jumped since the Ukraine invasion; survey-based measures also reflect elevated expectations, though the latest surveys were conducted before the invasion of Ukraine.

Consumers’ rising expectations for higher prices aren’t a coincidence. D’Acunto says overall inflation expectations are most heavily influenced by changes in grocery prices, even as such prices are stripped from core inflation metrics. Two months ago, about a fifth of U.S. households said they expected broad price inflation of at least 10%. D’Acunto says that share has shot up to over 60% of households as grocery prices quickly increase. The upshot: As grocery prices climb, so do the odds of unhinged inflation expectations, opening the door to an upward spiral in prices.

History shows that can be a tough spiral to get out of, and one that makes the Fed's job even harder. 

You can read the rest of Lisa's cover story here.