Does QE Drive Food Prices Up? A Simple Explanation
Does QE have anything to do with rising food prices?
A quick glance at the chart below, which shows the CPI for food and beverages vs bank reserves would suggest that it has.
Again, beware the trap of correlation and causation.
Food inflation is not really a function of monetary policy.
In shorter time frames, sharp changes in food prices are much more affected by supply issues caused by bad weather, natural disasters, and poor transport/supply chain infrastructure (this last factor is especially pertinent during the Covid era).
Over longer time frames, demographics, population dietary preferences, agriculture legislation, and legislative issues surrounding the use of arable land are all factors that can contribute to large changes in food prices.
Monetary policy, be it changes in Central Bank interest rate policy or QE, cannot really have a large impact on food prices.
This is simply because 1) Reserves are not lent out, and 2) Even if Reserves were lent out, why would so much of the extra Reserves be spent on food to the point where it causes food price inflation?
Here’s another way to think about it: food is one of the last budget items to be cut from household spending since people don’t want to starve.
As such, if households got access to more cash; while some families might buy more food, or more expensive types of food, the overall amount of increased expenditure just would not be high enough to cause astronomically high levels of food inflation.
There is, however, an exception to this general reality, which occurs when an economy is doing extraordinarily well. Where extraordinarily refers to the proverbial tide “which lifts all boats”, and the majority of people are participating in, and enjoying, the positive effects of broad based economic growth.
In such a scenario, it is possible for rising levels of prosperity to lead to higher food prices as many families spend more on types of food that they could not previously afford.
Generally and historically speaking, this has tended to mean higher expenditures on meat, fresh food, as well as healthier types of food.
Unfortunately, this isn’t the case today, and the real problem is QE failing to create the economic growth that it was supposed to create, leaving the labor market in bad shape.
As a result, a lot of families face falling levels of disposable income just as food prices (energy prices too), begin to increase rapidly.
Consquently, there are parts of the population that are still struggling economically, even as prices for basic necessities rise.
Is stagflation a real possibility?
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