More Food Inflation Is Coming

Inflation numbers of all sorts have calmed down since the wild days of Covid shutdowns messing up the supply chains.  But inflation numbers for at least the food category are about to see another surge upward.

That is the message of this week's chart, which shows how the movements of gold prices tend to get echoed about a year later in the prices of wheat futures.  This principle also works for corn prices (not shown).  Because grains are an important input into lots of finished products for food, including meat, a rise in grain prices generally is going to lead to rising food prices.

Gold prices bottomed on a monthly basis in October 2022, and have been rising strongly since then.  And wheat prices bottomed almost a year later, in September 2023, starting to rise on gold schedule.  But just recently wheat prices have fallen just a little bit, taking them off of gold's script.  I expect wheat prices generally to get back on track again and start rising for at least the next 12 months, following in gold's footsteps.

This relationship occasionally goes off track in a much bigger way, when a weird exogenous event puts a thumb on the scale.  Covid is a great example.  The 2008 commodities bubble is another, when all of Wall Street suddenly went mad for commodities indexing (because stocks no longer worked in 2008).  Outside of conditions like that, this is a pretty durable relationship.

And the 12 month leading indication for food prices generally also works with gold, as seen in this next chart.

This shows the Consumer Price Index (CPI) subindex for food and beverage compared to gold prices, and with the same 12 month lag time employed.  These CPI data are reported with their own lag, but reflect what was happening as of the month for which each datum is recorded.  The overall correlation with gold is not as tight as it is for wheat, but the timing of the up and down movements still generally matches up.

Falling food prices (through Feb. 2024, the most recent available) reflect the drop in gold prices just over a year earlier.  We are not yet seeing an upsurge in this measure of food inflation quite yet, in part because wheat and corn prices have fallen in the past 8 months.  But another rise should be coming, assuming that this relationship continues to work as it has been working for the almost 50 years that gold has been freely traded in the U.S.

The latest FOMC meeting announcement, and Chairman Powell's comments afterward, indicate that the Fed officials think that they are getting inflation under control, and so their interest rate targets can presumably start falling sometime in 2024.  They are soon going to find out that gold's message means more inflation generally is coming.