No Inflation? Fed Calls Food, Energy Gains ‘Temporary’ Despite 24-Year Rise

Inflation is likely last on the agenda of the Federal Reserve’s two-day meeting beginning Tuesday. After all, policymakers' preferred measure of inflation, which excludes food and energy, inched just 0.1 percent higher in September for its smallest increase since March.

Exchanging Money
Michael (Mx5tx)
Exchanging Money

However, many economists and investors say that in this globalized world, it’s time the Fedstops treating food and energy gains as temporary and pays more attention to the two inputs that hit consumers hardest. Especially before they implement any more stimulative policies for markets.

The demographics behind the food trade were on investors' minds on Monday, in particular, when the world's population surged past 7 billion.

“Contrary to some monetary policymaker protestations, we believe the rise in food and energy costs is highly unlikely to be temporary,” said Joe LaVorgna, chief U.S. economist for Deutsche Bank. “To be sure, food and energy prices are extremely volatile, but this does not mean that these prices tend to decline.”

Since 1987, there has never been a five-year period where food and energy prices declined on an annualized basis, according to LaVorgna’s calculations. Only four years in the last 24 have seen a decline in combined food and energy prices in the CPI.

This hardly seems “temporary.” Yet on the Bureau of Labor Statistics website it states that the so-called core CPI “is closely watched by many economic analysts and policymakers under the belief that food and energy prices are volatile and are subject to price shocks that cannot be damped through monetary policy.”

“Because of the globalization of the economy and the U.S.’s diminished importance as countries such as China and India continue their growth, we are becoming price takers rather than price setters,” said Patty Edwards of Trutina Financial. “It is a long term issue, and frankly as people in these emerging economies become accustomed to eating more than one meal a day or having protein on more than a sporadic basis, we see the food inflation growing rather than diminishing.”

Food and energy markets are among the top performers in October, snapping back with the stock market. Crude oil climbed 17 percent during the month, while prices for corn and orange juice futures jumped 9 percent and 13 percent respectively.

When the Fed last put out a statement in late September, commodity prices were off their highs. The central bank acknowledged this, saying “the Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate further.”

It will be interesting to see if they acknowledge the rebound. October’s bounce should serve as a reminder to the rate-setting committee that the rise in food and energy is secular rather than cyclical, traders said.

“Food & energy should not be stripped out, as they are arguably more important than other measures,” said Michael Murphy of Rosecliff Capital. “The recent financial crisis will hopefully shine a light on a lot of the areas in government reporting that need to be improved, i.e. multiple revisions of economic data and jobless claims.”

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