Road Warrior

Economic inflation and its effect on agriculture

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It is enjoyable conducting seminars and speeches with some of the leading lifelong learners in agriculture. Of course, many are interested in my perspectives on the economy. One comment that usually raises eyebrows is discussion about the inflation rate. When I present the current inflation rates, many ask if we can trust the government data. Often they say, “My inflation rate seems much higher.”

Government inflation data is presented in terms of core and headline inflation. Core inflation comes from price levels of a basket of goods, not including food and energy. These two items are considered volatile, so they are not included in core inflation, since it is a metric used for cost-of-living adjustments, and Social Security and pension increases.  Headline inflation includes food and energy and is a gauge of the overall inflation rate. The current core inflation rate is 1.7%, actually down from 1.9% in the beginning of 2013. Headline inflation is 1.5%, down from 1.6% at the beginning of 2013. The Federal Reserve would like these rates to remain below 2.0% and 2.5% respectively for core and headline inflation before taking action to increase interest rates.

Now to address agriculturalists’ concerns, the rate of inflation in recent years has been estimated to be between 5% and 10% for agriculture. The increasing cost of inputs, equipment, and farmland has this sector in an inflationary mode.

The rate of inflation is affected by the velocity of money, or the number of times dollars turnover or are spent in the economy. Inflation is low in the general economy despite Federal Reserve action to print more money because velocity is low as institutions, businesses, and people in general are maintaining high levels of cash on hand.  Contrast this to the agricultural economy in which recent prosperous times have led to investment and spending in agricultural and rural areas, thus the velocity of money is much higher in agriculture and rural areas.

Government inflation data is the best we have; however, one always needs to verify. The inflation rate for producers is much higher than the reported rate, and could indicate negative margins in the making, particularly if commodity prices continue to decline.

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What's Road Warrior?

Dave Kohl is an ag economist specializing in business management and ag finance. He can be reached at sullylab@vt.edu.

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