In a document published in March of this year through the Government Accountability Office (GAO), food inflation between 2021 and 2022 increased to 11. 0%, the largest accumulation of food costs in more than 40 years. The GAO also reports that food inflation rates over the past 10 years ending in 2022 are around 2. 0% consistent with the year.
What are the reasons for food inflation? Are foods trending up or down?
Some believe that the Biden administration’s policies are the explanation for why inflation is high. While government policies can affect consumer prices, they are not the primary cause in most cases. What is causing the existing food inflation? Inflation exists when demand exceeds supply. That’s why we want to take a look at the underlying causes.
Getting food to the customer consists of 3 steps: production, processing, and distribution. Producer prices vary according to the cost of feed, the value of fertilizers, and animal and plant diseases. Processing and distribution prices are affected by the cost of packaging. and other materials. The source of labour is the main factor, which of course has been disrupted by Covid-19.
In the United States, most farm animals live on factory farms and are fed a grain-based diet. The pandemic and Russia’s invasion of Ukraine (the main grain exporter) have contributed to a relief in feed supplies. In addition, due to the effort to mass-produce for maximum profit, those animals are housed in tight spaces where they are not allowed to roam. Due to the lack of space, sanitary situations are far from ideal, as animals are forced to live in their own feces, leading to an increased occurrence of diseases. Therefore, maximum doses of antibiotics are given to prevent the animals from becoming ill. These are just a few of the points that contribute to a higher charge for consumers. The war between Russia and Ukraine is perhaps the main cause of this situation.
When Russia invaded Ukraine, the cost of animal feed increased significantly, as Ukraine produces a significant portion of the world’s grain. More specifically, Ukraine produces about 10% of the world’s wheat, 15% of corn, and 13% of barley. When production is interrupted so much, the source decreases and charges tend to increase. Corn and wheat are also the most common grains used in cereals. Thus, the new grain charges have had a negative effect on much of the U. S. food source.
When the origin chain was disrupted by the pandemic, the FDA provided some regulatory relief by allowing food destined for restaurants to be diverted to grocery stores. This action was vital to prevent even more severe shortages and rising food prices. In addition, USDA has provided investment to meat and poultry processors so they can expand their operations. The company has also provided budget to help scale up fertilizer manufacturing. Despite those and other actions, gains have been somewhat limited.
The other aspect of the equation is need. As discussed above, if demand exceeds the source, costs tend to increase and vice versa. Obviously we had a relief at the source, which started with Covid-19. In response, the federal government approved a series of expenditures that tended to stimulate the economy. In short, the federal government added a lot of money to the system. This excess cash increased customer demand, further exacerbating the imbalance between source and demand. In other words, the gap between source and demand has widened considerably. Thus, the federal government, in its attempt to help the economy, has become a vital catalyst in creating the highest inflation in more than 40 years. When Congress ramps up its spending, its members seek to allocate cash to their constituents, and it becomes a spiked punch bowl that everyone needs to drink from.
When Congress passed the Inflation Reduction Act in 2022, despite its name, the net result was likely an increase in inflation rather than a decrease. For what? The bill comprises tax credits and deductions for businesses and individuals, which help spur economic growth.
The Federal Reserve has also played a key role. In hindsight, the Federal Reserve kept interest rates too low for too long and believed that inflation was going to be transitory. Both of these problems have contributed to the existing inflationary cycle.
The gap between supply and demand has narrowed, but there’s still plenty of government stimulus left in the formula and the economy is running faster than the Fed would like. Even though food inflation has eased slightly, it is still too high. The scenario may normalize soon, but with the upcoming election Washington will most likely continue spending, which will stimulate the economy and make it more difficult to bring inflation down to the Federal Reserve’s 2. 0% target. It’s quite conceivable that the Fed will want to be more competitive in its fight against inflation.