This week’s inflation data reflects continued challenges in slowing the economy.
The Consumer Price Index showed inflation on an annualized rate to be 6% in February. This is on top of the 7.9% inflation we had this time a year ago. Combining the two numbers indicates inflation to be more than 14% over a two-year period.
“The Fed’s having a very tough time. They keep raising interest rates as a way to tame inflation,” said Jim McCormick of AgMarket.Net. “Earlier the thought was that they’re going to raise rates, and then they’re going to stop. Maybe we’d hear that familiar term 'the pivot,' where they may even cut rates. What we’re seeing with these jobs numbers, we’re not seeing the economy slow down. The reality is that the American consumer is still on a buying spree. He may not be buying a bunch of retail, but when you look at vacations; down here in Orlando the hotels are full, the trade shows are full. That’s great for the economy, that’s great for agriculture, but that’s not good for the Fed.”
McCormick said farmers need to be aware that interest rates must continue to move higher until the economy is cooled, and when that will take place is anyone’s guess.
“If that interest rate goes up, that farm loan is getting more and more expensive. And that cost of storing grain is getting more and more expensive. So, there is a negative aspect, especially with these higher interest rates. But when is the economy going to slow down? It’s hard to tell, because we’ve been expecting a slowdown … at least three to six months waiting for a weakness in the jobs numbers, and it has not developed.”
Food inflation continues to move higher. In this week’s report, food prices increased 9.5%, while the food at home category is up 10.2%. Yet consumers keep spending, not just on food but other purchases.
“Some people say it’s still hangover from the pandemic,” McCormick said. “I don’t believe so; I think we’re getting back to what American’s do. Americans spend, and they tend to overspend.” He adds that wage growth, while consistently lower month after month, has still come close enough to where the consumer feels comfortable spending.
Farmers are bracing for lower commodity prices this year, which adds to the concern that comes with higher interest rates. But there are still plenty of possibilities for strong prices in 2023 if the supply side shows signs of weakness.
“If we stumble, or if Brazil continues to stumble … the world stocks when you take China out of the equation are still very, very tight,” he said at Commodity Classic. “And that’s what the government is worried about—if everything goes well, prices are likely to drop. But if not, there’s not a lot of grain left in reserves.”
World grain movement could come even more into question if Russia, Ukraine, and the UN are unable to extend the Black Sea grain initiative, which has a looming deadline.”