USA: There’s no one simple cause for higher food prices

August 8, 2023

By guest author Paul Krugman, Opinion Columnist from the News York Times.

Sometimes I talk about inflation with real people — no, not Trump supporters in diners, but people who don’t pore over Bureau of Labor Statistics reports or argue about the relative merits of trimmed mean versus multivariate core trend inflation. And while people don’t necessarily disagree with the proposition that inflation is coming down, they do inevitably bring up the cost of groceries.

It’s a fair point. Yes, there’s a negativity bias in perceptions of food inflation, in which big jumps make a stronger impression than big declines. For example, the Eggpocalypse of 2022 got a lot more attention than the rapid normalisation of 2023:

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Still, it’s true that grocery prices have risen considerably more than average consumer prices since the eve of the pandemic:

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Why? Can we blame Bidenomics? Or are surging food prices an example of “greedflation,” inflation caused by price gouging?

No and no. OK, the economic surge under Biden may have had some marginal impact on food prices, especially because it has led to big wage gains for low-paid workers, including workers at supermarkets. And I wouldn’t rule out the possibility that some big players in the food business have taken advantage of general inflation to exploit their market power even more than usual. But the key point to understand about food inflation is that it’s a global phenomenon, outside the control of any one government (except, in a sense, Russia’s — I’ll get there in a minute) and transcending the pricing policies of even the biggest businesses.

Here’s the key picture, a comparison of global food prices, as estimated by the World Bank, and U.S. grocery prices:

Given that huge rise in global prices, how could prices in the United States not have gone up a lot? Indeed, there have been big food price rises around the world, for example, in Europe:

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Now, the prices U.S. consumers pay for food haven’t closely tracked the global price index, and in general have gone up by less. But that’s not surprising, because the indexes are measuring somewhat different things. The World Bank is estimating the prices of raw foodstuffs, while the Bureau of Labour Statistics is measuring the prices of purchased foods — loosely speaking, bushels of wheat versus loaves of bread.

This distinction drives a wedge between global prices and the prices paid by shoppers, and this in turn means that non-global factors can play some role in grocery inflation.

For example, a White House blog post on grocery prices cited, among other things, “pandemic-induced shifts in food demand from restaurants to groceries.” This is a version of the toilet-paper problem. Remember that? Part of the issue was that the toilet paper sold in stores is different from the toilet paper sold to businesses and restaurants, and when millions of people suddenly began staying home, the industry temporarily found itself producing the wrong kind of stuff. Similar issues arose when people stopped eating out and bought more food for home use.

Also, getting food into your shopping cart involves a number of costs over and above the price of food commodities. Among these is the cost of labor. Retail food employees earn notoriously low wages, but tight labor markets have led to significant gains for the worst paid workers, which must have had some impact on consumer prices.

And yes, maybe there was some price gouging. But it can’t have been central to the story. If it were, we wouldn’t have seen egg prices come down as fast as they went up.

So food inflation is mainly a global story. But what caused that global food spike? It seems to have been a perfect storm of adverse events (including actual storms).

At the top of the list was Russia’s invasion of Ukraine. After the fall of the Soviet Union, the “black soil” belt that stretches across Ukraine, Russia and Kazakhstan regained its historic role as one of the world’s great agricultural heartlands, but now it is, once again, a war zone.

The Russian invasion was also one, although not the only, factor in an extraordinary surge in fertilizer prices: