The hyperinflationists have been latching onto the huge jump in wheat prices to try to salvage their collapsing economic thesis of turmoil and demise based on rising prices. In a recent research report, however, Danske Bank describes why “agflation” will have an “insignifiant” impact in the USA:
“The fact that price rises have so far been contained to the wheat market suggests little imminent pressure on consumer prices. On the whole, we do not expect “agflation”, i.e. inflationary pressure induced by rising prices of agricultural products, to become a prevalent phenomenon within our forecast horizon.
The recent run-up in wheat prices will not lead us to change our current forecast for US consumer price inflation of 1.6% y/y in 2010 and 2011.
The impact on the CPI food index from the current “wheat price shock” will be a minor 0.3pp to the six month annualised inflation rate over the coming months as the shock feeds through to consumer prices with a lag. With the food index weighing just below 14% in the overall CPI index this means that the current spike in wheat prices will add a insignificant 0.04pp to our current estimate of annual headline CPI over the coming six months before fading away gradually.
In an alternative “agflation” scenario with a general increase in prices on agricultural products and a run-up in the overall CRB foodstuffs index, we would get a more significant impact on US CPI. Assuming an increase in the CRB foodstuff index of 30% over the coming three months followed by a levelling out, this would start to show up in the CPI food index in about six months. The peak effect of such a shock would occur in spring 2011 with a boost to annual consumer food price inflation of around 6pp. CPI food would then gradually return to the underlying trend by end 2011.
The overall impact on headline CPI in 2011 in an “agflation” scenario would be a boost of 0.5pp taking annual CPI to 2.1% for the year, which is still a relatively low inflation rate. With the Fed targeting primarily core inflation, we do not expect any monetary policy reaction to such a shock. On the contrary, a run-up in food inflation works as a tax increase for the consumer and risks pushing real private consumption lower dampening overall economic growth.”
Not even a record jump in wheat prices can put a dent in the deflationary trends….
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.