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Inflationistas like to bandy about rampant commodity price inflation around the world as a sign that high levels of U.S. domestic inflation are on the way. Eventually, 50% higher commodity prices surely have to spill over into the U.S., right?Well, no, or at least, not by an equal magnitude.
A key reason why commodity price volatility is such a threat in much of the world, while being far less of a threat in the U.S., is that Americans eat food whose cost of production is far less exposed to agricultural prices.
For example, the price of peanuts is just a small fraction of the price of a jar of branded peanut butter. Thus when peanut prices rise 10%, the cost to produce a jar of peanut butter doesn’t rise nearly as much. Yet in nations where people eat less processed and branded food, buying meats and vegetables from a fresh market for example, then a 10% surge in commodity prices is far more painful for consumers.
This and other factors leads Morgan Stanley to believe that commodity surges we’ve seen so far won’t cause high inflation in the U.S.:
Richard Berner @ Morgan Stanley:
Commodity food prices are soaring and will soon start to push up food costs for consumers; many commodity quotes are up 20-65% over the past six months. But we estimate that the translation from commodity to retail price hikes will only be about 2-3%, and that the direct impact on overall inflation will amount to just 0.2-0.3%.
From farm to table: Much smaller increases: Four factors typically mute the translation of commodity to finished food prices: raw material costs are a fraction of the price of finished foods; sellers partially absorb commodity costs in their margins; when feedgrain quotes jump, meat prices plunge as herds are slaughtered; and consumers will substitute cheaper foods for more expensive ones.
Modest upside risks to food and overall inflation: A weaker dollar and increased excess demand would hike food quotes further. In turn, further commodity price hikes likely will sustain higher inflation expectations, perhaps pushing up overall inflation by more than we expect. But we see little chance that rising food quotes will soon contribute to an upside breakout.
Eating more processed food actually insulates America from price volatility.
(Via Morgan Stanley, Global Monetary Analyst, 17 November 2010)
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