Impact of grain price shocks may be lessening

October 21, 1998

The impacts on consumers' food prices of spikes in food prices at the producers' level have been somewhat weaker in the most recent episodes. Grain price shocks, defined as a 20-percent or greater increase in the annual average producer prices for at least two of the three key feed grains (corn, soybeans, wheat), occurred in 1973-4, 1988, and 1996. In general, these shocks have been associated with a 2-year period in which food inflation has surpassed core inflation at the consumer level.

Percent change in annual average PPI for corn, soybeans, and wheat, 1973-74, 1988, 1996
[Chart data—TXT]

In 1974, the food and beverages component of the Consumer Price Index (CPI-U) rose at 1.65 times the rate of core inflation (CPI-U less the food and energy components). In 1989, food prices for consumers rose at 1.27 times the rise in the "core" CPI. In 1996, the ratio of the increase in food prices to that of the CPI less food and energy was 1.19.

One way the dynamics of price transmission has changed is that the price consumers pay for food is less dependent on the price the producers—farmers—receive. The farm value portion of food costs has trended downward for years.

Another change in the dynamics is that the increasing consolidation of agricultural businesses has created opportunities to realize economies of scale. The resulting slower rise in unit costs combined with the continued presence of competition has further reduced the impact of farm price shocks on food inflation.

These data are products of the BLS Producer Price Indexand Consumer Price Index programs. For additional information, see "The 1996 grain price shock: how did it affect inflation?," Monthly Labor Review, August 1998.

SUGGESTED CITATION

Bureau of Labor Statistics, U.S. Department of Labor, The Economics Daily, Impact of grain price shocks may be lessening on the Internet at http://www.bls.gov/opub/ted/1998/oct/wk3/art03.htm (visited September 30, 2014).

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