Should a forecast of more rapidly rising food prices lead us to fear more rapid inflation?
Brad DeLong links to this commentary on Alan Meltzer's recent WJS op-ed. Let us quote from Meltzer's piece:
We are now left with the overhang. Inflation is in our future. Food prices are leading off, as they did in the mid-1960s before the “stagflation” of the 1970s. Other prices will follow.
Meltzer, earlier in his essay, pointed to a forecast of a 3.5% increase in food prices over the coming year as a reason to be concerned about an inflationary upsurge.
Well, when I see something like that, I have to ask, "Really?" And so, what did happen to inflation in the 1960s? The flowing chart shows the rolling 12-month rate of inflation as measured by the CPI (black), the rolling 12-month rate of inflation as measured by the CPI excluding food (blue), and the 12-month rate of increase in food prices (red).
(Click to enlarge.)
I suppose one could (charitably) conclude that, yes, in the mid-1960s, food prices rose somewhat faster than did prices in general, or prices excluding food. But in the late 1960s and early1970s, food prices rose more slowly. I'm not sure that we can, then, conclude that food price increases are a harbinger of faster overall inflation. It is true, in general, that food price increases tend to lead overall price increases--the correlation, over the 1947-2014 period, between food price increases in the most recent period and overall price increases one year later is 0.659. So Meltzer's point is not entirely specious. But it is certainly not proof of a causal relationship. And, if it were, the experience of the recent past, during which food prices have increased at rates of less than 2% per year for the past 18 (overlapping) 12-month periods is hardly cause for (immediate) concern.
Meltzer's concern that a forecast of more rapidly increasing food prices are a harbinger of more rapid general inflation, then, should, first of all, lead us to ask how accurate such forecasts have been in the past. But, even if he is correct, inflation rates of around 3% are hardly the end of the world.
(Click to enlarge.)
Indeed, a rate of increase in food prices of 3.5% seems, on average, to imply a rate of (CPI) inflation of about 3.5% one year later. The (roughly) 1.5% rate of increase in food prices over the past year implies a rate of inflation of about 2% over the next year. On the other hand, the (roughly) 2% increase in food prices of the 1-2 year ago period would have suggested, on average, about 2.8% to 3% (CPI) inflation, and that has not transpired.
Finally, there's nothing in the historical data that suggest that food price increases build on themselves, or on the overall rate of inflation. That is, there's no evidence that food price increases accelerate on their own, or as a consequence of increased (CPI) inflation.
I don't mean to dismiss Meltzer's concerns, but the evidence does not suggest that there's a whole lot to worry about in the present circumstances.