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Inflation: Temporary or permanent

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Watch the Index of Consumer Sentiment, published by the University of Michigan. If this number remains above 90 for six or more months, the inflation trend could become more permanent.

From Main Street to Wall Street, the question on many people's minds is whether inflation is temporary or permanent. If you operate and live in the commodity world, the year-over-year price changes have been astounding. Corn and soybeans are leading the way up 106 and 83 percent, respectively. Cotton and wheat are following the parade with price increases of 40 and 37 percent, respectively.

These increases are mild compared to lumber, crude oil, gasoline, and copper which have tallied in at 275, 99, 102, and 89 percent increases, respectively. If one purchases a candy bar, noticeable price increases have occurred as a result of sugar prices up 56 percent. These cost increases have people thinking back to the 1970s when overall inflation registered between 10 and 14 percent during the middle of that decade.

There is no doubt that fiscal and monetary policy in the U.S. and in many developed countries around the globe have been a contributor to rising inflation. In 2020, about 14 percent of the world's approximately $80 trillion GDP was a result of stimulus checks.

The economic reopening and supply chain issues due to concentration have also had an impact. Distribution snags, such as the Suez Canal challenges, have been contributors to short run supply and demand imbalances. Of course, inventories have been depleted around the globe. In some countries such as China, stockpiling policies have resulted in prices peaking. These pockets of scarcity have resulted in added costs, which have been passed on to the consumer in some cases.

To determine if inflation is temporary, pay close attention to certain commodities. Lumber prices per 1,000 board feet were north of $1,700 and now have retreated to the $1,200 range as the housing market has become overpriced and sawmills are opening back up. Subsiding housing starts have also contributed to the pullback in lumber prices.

The closure of mines during the pandemic created temporary shortages in metals, which are used in manufacturing. Many mines are opening back up, but there is considerable speculation with investors in commodities that have driven prices to uncomfortable ranges. China consumes half of the world's refined copper but has cut consumption noticeably.

If one examines the aforementioned variables, the case for temporary inflation could be built if supply and distribution bottlenecks are remedied. However, the current velocity of money is in a range not seen since the 1970s. This may result in too much money chasing too few goods, a prime component of temporary and permanent inflation.

Over the next few months, closely watch the Index of Consumer Sentiment, published by the University of Michigan. If this number remains above 90 for six or more months, the inflation trend could become more permanent. Of course, for the agriculture industry mother nature is the wildcard in the major production pockets throughout the globe.

Source: Dr. David Kohlwhich is solely responsible for the information provided and is wholly owned by the source. Informa Business Media and all its subsidiaries are not responsible for any of the content contained in this information asset. 

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