The Federal Reserve has come under strong attack recently for the outbreak in global food and energy price inflation. The ensuing discussion has drawn commentary from Paul Krugman, who favors climate-change and crop failure to explain recent food commodity prices, to various commentary such as yesterday’s WSJ Op-Ed, The Federal Reserve Is Causing Turmoil Abroad. Krugman is a consistent defender of FED policy, and remains sanguine on inflation. The financial community more generally, despite its enthusiasm for the effects of reflationary policy on the stock market, suffers from normalcy bias with regard to commodity prices and is more persuaded by monetary policy’s role in prices.
The unwavering position here at Gregor.us however is that while global monetary policy can amplify price moves in many commodities, when it comes to oil—the master commodity—flat to declining global oil production over the past five years is the most important factor in price. Moreover, because oil is such a key component of food and because the overall energy-intensity of food is also an emergent issue in the developing world, I cannot blame the FED for what’s happened to oil prices. Or food prices.
However, it’s clear the FED is newly sensitive to these matters. This week, while investigating the collection of research at the San Francisco Federal Reserve, I noticed the following graph was highlighted at their website under the tab: Data Dive. Click to enlarge:
Here is where I part ways with the Federal Reserve. The chart is from a 2008 paper by Bart Hobjin, Commodity Price Movements and PCE Inflation.
The thesis of the paper will be familiar to current readers of Krugman’s blog, which is that commodity prices play a small role in expenditures, and that often the price of say, wheat, only makes up a portion of the price of bread. But that’s not the crucial metric if one is mainly concerned with the fate of the US economy and how energy and food prices affect Americans. Currently, just as in 2007-2008, the absolute price of gasoline and groceries is hammering away at lower income earners in the US.
This next chart (click to enlarge) from the Bureau of Labor Statistics shows food expenditures by income. As many, many others have noted, the strong rate of change in food and energy prices hurts the bottom two, and likely the bottom three quintiles of US wage earners.
Now, is it any wonder that over 43 million Americans are taking part in the SNAP-Supplemental Food and Nutrition Program? Food stamp participation is not merely explained by unemployment.
What led me originally to the San Francisco Federal Reserve website was my current view that California is very close to slipping back into recession. As longtime readers know, I have for years tracked employment, energy costs, transport spending, the budget, housing, tax revenues, and the history of all these in California. Because California remains one of the US states most powerfully exposed to rising oil prices I have also done some data diving of my own into state-level SNAP (Food Stamp) figures. Here is the latest for San Bernardino County (click to enlarge):
Among the three largest food stamp using counties in California—Los Angeles, San Bernardino, and Riverside—I have seen no slowdown yet in participant growth. Food stamp data is especially important because it confirms the fragile income thresholds over which rising food and energy costs can flow.
I suspect at the Federal Reserve it’s no accident that they want to beat back the view that reflationary policy is wholly responsible for energy inflation. Fair enough. But going further, and trying to imply that the American economy is not hurt badly by rising food and energy costs strains credibility. Because of these and other data points, I have suggested to the San Francisco FED that it’s time they prepared for a new recession in California.