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Two Very Different Views On Soaring Food Inflation

Tyler Durden's picture


Two rather amusing, and quite opposing views on surging food inflation (recall that as we first reported beef prices are at record high), which was confirmed by this week's PPI and CPI reports: one from Goldman, the other from IHS Global. We let readers decide which one is right... and which one will determine the Fed's "thinking" about soaring good inflation.

First, some unintended humor from David Mericle, the latest addition to Goldman's economics team, which lost all credibility some time in 2010 when Hatzius got his first (of many) tap on the shoulder.

Impact of Higher Food Prices on Core Inflation Should be Modest


Agricultural commodity prices have risen sharply in 2014, with the S&P GSCI Agriculture & Livestock Index up about 15%. In addition, concerns ranging from droughts in California and Latin America to political tensions in Ukraine threaten to push food prices higher this year. Today, we assess the implications of higher food prices for the inflation outlook.


In the aftermath of spikes in agricultural commodity prices in 2007-2008 and 2010-2011, both retail food prices and core and headline inflation increased substantially. However, those episodes differed from the current one in two key respects. First, the food price spikes were about four times as large. Second, there were simultaneous spikes in oil prices that likely accounted for most of the pass-through to core inflation.



Our statistical model suggests that while agricultural commodity prices show moderate pass-through to food goods and food services prices, they have little impact on non-food core inflation. Both our model and the US Department of Agriculture's projections suggest that food prices should boost core inflation by roughly 0.05pp and headline inflation by about 0.15-0.2pp by end-2014. While ongoing droughts pose upside risk, a reversal of recent increases in grain prices--in line with our Commodity strategists' forecast--poses downside risk.


Looking ahead, we do not expect the recent spike in agricultural prices to continue through 2014. Our Commodities research group expects prices for wheat, soybeans, and corn to fall later in 2014, and our food equity analysts expect their Cost of Goods Sold Index to rise only moderately this year. Projections from the US Department of Agriculture point to roughly 2.5-3.5% growth in both food goods and food services prices, a bit higher than our model would predict if the Agriculture Index were to remain flat from its current level.


If the USDA forecast proves correct, it would imply that food prices will contribute about 0.19pp year-over-year to core PCE inflation by end-2014 (vs. 0.13 as of February), 0.39pp to headline PCE inflation (vs. 0.17), and 0.45pp to headline CPI inflation (vs. 0.21). Overall, we expect higher agricultural commodity prices to contribute about 0.2pp to headline PCE inflation and about 0.05pp to core PCE inflation. Food goods and services prices could of course also rise for unrelated reasons as the labor market tightens and new state minimum wage laws take effect.


In terms of risks to our forecast, further tensions in Ukraine or worse-than-expected drought effects pose upside risk, while declines in grain prices expected by our Commodities team pose downside risks. In addition, the forecast for an El Niño weather pattern developing this summer creates additional upside risk to soft commodity prices (palm oil, cocoa, coffee, sugar) and to a lesser extent to wheat prices. However, the El Niño weather pattern is also typically favorable to US summer growing conditions, which would create downside risk to our Commodity strategists' already-bearish forecasts for these crops, which are among the largest components of the S&P GSCI Agriculture Index.

In other words, as we also predicted previously, soon everything will be El Nino's, aka the "Solar Vortex" fault. As for Goldman's statistical model saying that all should be well, who are we to dispute it.

In the meantime here is a completely different view, one actually somewhat grounded in non-model reality, from IHS Global via Bloomberg:

Limited inventory of cattle and other herds contributing to rising costs this quarter, Chris Christopher, economist at IHS Global, writes in note.

Rising prices “a kick in the stomach for those households that have a hard time making ends meet.”  “Main story” of March CPI was food, with meat, dairy and fresh vegetables contributing to higher costs. Outside of food, inflation "relatively bland." However, "living standards will suffer as a larger percentage of household budgets are spent on grocery store bills, leaving less for discretionary spending."

But... core inflation will be untouched. Goldman's model said so. Which means nobody be concerned: certainly not Goldman partners and their live-in chefs.

The one thing that the two agree on, however, is that food inflation is surging. However there is good news:


One thing is not quite clear - whose households? Dimon's and Blankfein's?

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Tue, 04/15/2014 - 12:07 | 4661416 Shizzmoney
Shizzmoney's picture



Yeah, his fucking wealth.


Tue, 04/15/2014 - 12:11 | 4661448 lordylord
lordylord's picture

If something doesn't make sense, ask yourself, "Is the government involved?"  If the answer is "yes",  then things start to make sense.

Tue, 04/15/2014 - 12:22 | 4661510 Herd Redirectio...
Herd Redirection Committee's picture

"Mr Bernanke, have you ever heard the story of The Emperor's New Clothers?  Can I hear your thoughts on the moral of its story?"

Tue, 04/15/2014 - 12:40 | 4661600 Shizzmoney
Shizzmoney's picture


"Mr Bernanke, have you ever heard the story of The Emperor's New Clothers?  Can I hear your thoughts on the moral of its story?"

Yeah, sure.....for $250,000 a pop.

Tue, 04/15/2014 - 13:09 | 4661745 ziggy59
ziggy59's picture

The Yogi Bera Economy..theres no inflation, but everything costs more...

Tue, 04/15/2014 - 12:21 | 4661499 LawsofPhysics
LawsofPhysics's picture

History is very clear on the consequences of a monetary (and political) system that allows a chosen few to print money and hand it out to their friends...


Hedge accordingly.

Tue, 04/15/2014 - 12:33 | 4661568 Herd Redirectio...
Herd Redirection Committee's picture

As a society, we have gone moneretarded.

Tue, 04/15/2014 - 12:44 | 4661614 ss123
ss123's picture

Does he know that some bacon is now over $7 a pound? BACON!

Tue, 04/15/2014 - 13:11 | 4661752 Rubbish
Rubbish's picture

They price me out of ice cream and fucking heads are gonna roll.

Tue, 04/15/2014 - 13:53 | 4661946 Marigold
Marigold's picture

Joos don't eat pork or bacon and therefor are not worried about it's price !

Tue, 04/15/2014 - 13:32 | 4661859 TrollHurter
TrollHurter's picture

But. but ,they told us there is no infation, except for gas, food and anything these dipwads want to not include in their " reporting"

Tue, 04/15/2014 - 12:08 | 4661421 pragmatic hobo
pragmatic hobo's picture

fuck you ben ...

Tue, 04/15/2014 - 12:08 | 4661423 maskone909
maskone909's picture

remember that special equation

food>income=civil unrest

Tue, 04/15/2014 - 13:22 | 4661805 messy
messy's picture

unless you drug the masses

Tue, 04/15/2014 - 12:08 | 4661424 El Vaquero
El Vaquero's picture

Isn't food excluded from the core CPI anyway?  Wouldn't that mean that a 1000% increase in food prices would not contribute to core CPI increases?  Or am I missing something?

Tue, 04/15/2014 - 12:13 | 4661456 Smegley Wanxalot
Smegley Wanxalot's picture

Anything that increases CPI is excluded.

Tue, 04/15/2014 - 12:21 | 4661503 Ghordius
Ghordius's picture

not in the eurozone. in fact, 70% of the "dreaded deflation" that makes the megabanks scream for Draghi action is because of decreasing energy and food costs. just saying

Tue, 04/15/2014 - 13:27 | 4661832 Kayman
Kayman's picture

Press Release:

From your government today: We strongly deny that the lack of oxygen during the last week of May has anything to do with the millions of deaths of American citizens.  By seasonally averaging oxygen availabilty we can clearly demonstrate that on average, there is sufficient oxygen.  Anyone suggesting otherwise must be in the camp of the terrorists.

Tue, 04/15/2014 - 12:19 | 4661494 all-priced-in
all-priced-in's picture

If the price of an iPad goes up - you can decide to not buy one -

If the price of food doubles you still must eat.

So a larger % of your income goes to food - which leaves (many people) with far less income  to spend on other stuff.

So IMHO - that would put extra pricing pressure on other goods - causing their prices to stay flat or maybe even decline.

Extreme food inflation could actually cause the core measure to be negative.

So bullish for QE.





Tue, 04/15/2014 - 12:27 | 4661530 centerline
centerline's picture

Exactly.  Increases in the prices of the things you need and decreases in the prices of things you do not need.

And, because of the squeeze, cars loans are getting funny.  Because most jobs aren't just walking distance and public transportation is not extensive enough to fill the void.

College is another example, but seen as a perceived need (at least for now).

Just wait until taxes and fees rocket up!

The net effect is deflationary though.  And is self-reinforcing.  Negative feedback loop.

Tue, 04/15/2014 - 12:28 | 4661531 El Vaquero
El Vaquero's picture

Yeah, I get that.  I'm just trying to wrap my mind around such an obvious propaganda piece being so obvious.

Tue, 04/15/2014 - 12:33 | 4661562 centerline
centerline's picture

The argument as to why food and energy are not included is that food and energy are too volatile.

Now that, my friend, is the propaganda.



Tue, 04/15/2014 - 12:08 | 4661425 Stoploss
Stoploss's picture

None of these cocksuckers have one ounce of credibility left.

Especially STANDARD AND POORS.........................

Tue, 04/15/2014 - 12:09 | 4661428 hobopants
hobopants's picture

pretty soon the hedonics will be adjusted so that only soylent green is counted...

Tue, 04/15/2014 - 12:27 | 4661529 Herd Redirectio...
Herd Redirection Committee's picture

We raise the rats, and then feed them to the cats.  We feed the cats in turn to the rats.

Tue, 04/15/2014 - 13:53 | 4661932 Its_the_economy...
Tue, 04/15/2014 - 12:09 | 4661430 SheepDog-One
SheepDog-One's picture

Never go full retard....Bernanke went there, and liked it so much he bought the company and is now Fullretardville CEO and mayor.

Tue, 04/15/2014 - 12:46 | 4661627 CrimsonAvenger
CrimsonAvenger's picture

That explains why he's walking aound holding a dildo like a scepter.

Tue, 04/15/2014 - 12:10 | 4661441 youngman
youngman's picture

It takes a few years to rebuild a herd of cattle....I think its going to be another drought year....so higher prices forever....but the sizes will just get smaller....you will soon get one bowl of cereal in a huge box....they will call it settling of contents....

Tue, 04/15/2014 - 12:17 | 4661482 Obama_4_Dictator
Obama_4_Dictator's picture

Talked to a guy who owns an HEB here, and he said something that shocked me, quote "no one knows it and they are trying to hid it, but there will be NO beef by 2020." 

Tue, 04/15/2014 - 12:22 | 4661507 LawsofPhysics
LawsofPhysics's picture

No beef by 2020? Good luck with that. 

Tue, 04/15/2014 - 14:55 | 4662215 Obama_4_Dictator
Obama_4_Dictator's picture

Just passing the information to you.  I hope he's wrong.

Tue, 04/15/2014 - 12:19 | 4661493 Obama_4_Dictator
Obama_4_Dictator's picture

Talked to a guy who owns an HEB here, and he said something that shocked me, quote "no one knows it and they are trying to hid it, but there will be NO beef by 2020." 

Tue, 04/15/2014 - 12:24 | 4661517 NOTaREALmerican
NOTaREALmerican's picture

He's talking about beef for the Trash Class.    The Elysium Class and Elysium Support Class, the most-fit members of society, will definitely have holistic happy grass-fed meat available for purchase. 

We've really got to stop treating the country as one nation; we're not all in this together.   You can't have a fully functional survival-of-the-fittest society if you don't have enough losers to feast off of. 

Tue, 04/15/2014 - 12:30 | 4661547 NotApplicable
NotApplicable's picture

The masses will have to learn to like fake meat made from soy.


Tue, 04/15/2014 - 12:49 | 4661643 SumTing Wong
SumTing Wong's picture

My guess is Moo-shelle is behind all of this "no more beef" stuff. Or Gandhi. Or those cows that Chick-fil-A employs. 

There will be beef in our pasture. That's for damned sure. Nothing like nice grass-fed steaks on the grill when they were just out in your alfalfa last week. I need to grill soon. 

Tue, 04/15/2014 - 13:42 | 4661896 LawsofPhysics
LawsofPhysics's picture

Bullshit.  It takes a lot less energy to let a goat roam around the yard compared to the energy required to make all the fake shit.

Sorry, not going to happen.

Tue, 04/15/2014 - 12:10 | 4661442 CHX
CHX's picture

Of course the food inflation does not show in the official stats - the same food package now only contains half of the food it used to. So nothing to see here, no inflation, but fear deflation ? /sarc

Tue, 04/15/2014 - 12:11 | 4661446 Smegley Wanxalot
Smegley Wanxalot's picture

I'm pretty sure we can print more meat.

Tue, 04/15/2014 - 12:15 | 4661473 CHX
CHX's picture

They want us to believe that a real pig is just the same as a paper pig, but unfortunately some pigs are just more equal than other pigs. Just ask people in the PIGS countries for starters, they probably eat a bit less (or more expensive) pig now than they did a few years ago... 

Tue, 04/15/2014 - 12:31 | 4661550 NotApplicable
NotApplicable's picture

Actually, it's more of a soy extrusion process.


Tue, 04/15/2014 - 12:33 | 4661563 db51
db51's picture

Fucking A....just get a 3D printer.   Yum Yum.

Tue, 04/15/2014 - 12:11 | 4661447 Kreditanstalt
Kreditanstalt's picture

"Non-food core inflation"?

WTF is that?  Food & energy (& taxes) is 99% for most of us...

Tue, 04/15/2014 - 12:14 | 4661467 Smegley Wanxalot
Smegley Wanxalot's picture

Yeah so rest easy.  That last 1% ... it's not gonna cost a lot more this month.

Tue, 04/15/2014 - 12:12 | 4661451 wolfnipplechips
wolfnipplechips's picture

Overall prices in my local market are +9 % already this year. Good thing my household wealth has been restored!

Tue, 04/15/2014 - 12:12 | 4661453 NOTaREALmerican
NOTaREALmerican's picture

Well,  I think they are talking about the effect of food inflation on the Elysium Class and Elysium Support Class.

I've got to admit that food inflation really doesn't affect my holistic grass-fed meet choices.

Now, I'm sure the Trash Class is being affected, but - seriously - a survival-of-the-fittest society means the Trash Class exists to be laughed at, right?

Tue, 04/15/2014 - 12:14 | 4661460 ArkansasAngie
ArkansasAngie's picture

It is a problem.  And it is a political problem amongst others.

And ... it is a Fed problem ... because while food prices will cause inflation to rise making untaper even more necessary, it's impact on stagflation will decrease demand.  What's the Fed to do.

Oh ... I get it now ... WAR!!!!!  Patriotic duty. to sit there and take. 

Tue, 04/15/2014 - 12:15 | 4661469 fonzannoon
fonzannoon's picture

This is a replay of 2010 and 2011. Fed tries to exit QE and the market taanks until the Bernak (it will always be the bernak) changes his mind and comes back in.

Tue, 04/15/2014 - 12:20 | 4661498 centerline
centerline's picture

Keep the powder dry!

Tue, 04/15/2014 - 12:37 | 4661587 hobopants
hobopants's picture

They may have found a temporary "solution" by using Belgium to pick up the slack...

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