Data Diving and the Federal Reserve: The Politics of Food and Energy Inflation

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 today’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 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.

Here is where I part ways with Federal Reserve. The chart is from a 2008 paper by Bart Hobijn, 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 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:

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.


  • Hi, Gregor- You seem to be conflating several phenomena here into quite a mishmash.

    First, real inflation which the Fed is worried about is continuous core price inflation that is driven by monetary phenomena. There is no danger of that happening while unemployment is high and aggregate demand is deficient in the US.

    Second, the rate of SNAP usage is a sign of far more than inflation or oil prices. It is a sign of a general breakdown in the ability of the modern deregulated capitalist system to maintain employment and distribute income in anything approaching an egalitarian manner. Income disparity has been increasing for decades, and the financial crisis (brought on by the well paid and the well-heeled by their predatory lending to the underpaid and desperate) has worsened the situation immeasurably. This in turn leads to decreased demand, and a Keynesian trap.

    Oil prices will be going up, and will cause prices to go up broadly, but not continuously. Such increases don’t represent ongoing inflation, since they will reach a plateau at some point where demand finally decreases to meet supply. This may cause a recession, double-dip, etc. But the response from the Fed and the government should certainly not be to “tighten belts” in any financial sense, other than directly reducing its- and our- use of oil.

    It would have been nice if we had policies in place that reduced our dependence on oil without waiting for peak oil to do it for us. So now we are at the mercy of those volatile markets, and looming shortages, and have to adapt in double-time. It is a sad story of missing foresight.


    Burk, my friend, today I agree with many of your points. There is indeed an organizational problem here, and I would call it a free-market failure. That said, sadly, it is going to be even harder in a world of global wage deflation and convergence to right the problem of US declining wages. A problem that’s been underway for some time.

    We have probably reached the point where monetary policy, floating somewhat freely while dysfunctional legislative policies undermine our need for reforms, becomes either neutered or distorted. Indeed, although I am a FED critic, I point out in this post what I feel cannot be blamed on the FED. I assume you understand that particular theme, in my post.

    It is a shame that the Democratic Party and the Obama Admin blew its opportunity to conduct many reforms in their first year. That loss was well documented here and I concentrated quite alot on the failure in transport. As you know, the Democratic Party is a huge supporter of the Auto-Highway complex. This is one of the reasons that even climate change policy promoted by the DEMS centered on the power sector, not transport. Even now, transport, which produced the majority of green house gases in the US, is supported proportionately by the Obama Admin in transport spending by an 80-20 margin. Indeed, no party in America is for transport reform.

    I would mention one point: the connection between food costs and energy costs is well established and the last decade the two have marched in lock-step.


  • Anonymous

    Hey Gregor… great stuff as usual (and I am a long time follower). I don’t comment much as your posts tend to reinforce my own conclusions and I am not much into quibbling.

    You might want contribute this to