The issue of food prices is a good example of where we can link market prices and inflation. Food prices generally are about to rise due to several factors:
1. The wet summer in the UK has led to a lower harvest and it is proving difficult to plant next years crop.
2. There have been droughts in the USA, Russia and southern Europe during the growing season.
This means that cereal prices overall are rising. It's due to a supply shock, relative scarcity has increased.
But this is going to feed through into inflation as it will cause a wider impact on prices.
Clearly the goods which use soya, wheat etc will have to pass on the extra costs. The price of bread for example. But cereal crops are also used to make biofuel and to feed animals. So we can, at the very least, expect the price of meat to rise too.
While these are changes in relative prices of individual goods this will feed through into inflation. Food is a significant item in average household budgets and so has a significant weight in the CPI. The rise in food prices, and goods which use inputs from the agricultural sector, will feed into CPI and cause a rise in the index.
This is, of course, quite reasonable. Average households will find the cost of living is rising
I believe it is good that the food index in the CPI is recording this as even though the rise price of these certain foods may not sustain. This increase in food price will still be there for a long time as it will take time for prices to return to normal again as the shortage in supply will still be there until the season when new crops are grown; so if CPI takes this into account households will know that their money is not worth as much as before allowing them to spend wisely on food. Also this will mean that transfer payments such as benefits and pensions can be increased to match this increase in food prices as the food index makes up a large proportion of the CPI. Also we can’t be completely certain that these price increases won’t be permanent as climate change may cause this poor weather to become a regular event, causing a poor harvest of the crop which will make the prices of the crop to remain roughly the same. Only an overhaul in agricultural production will prevent climate change form causing poor harvest in the future therefore, hence making the increase in food prices temporary so the CPI should measure this if this happens. However,i won't matter if the CPI records this increase in the food index, households will still be worse off, but the government can try offset the effects or minimise them through policies and transfer payments.
ReplyDeletethe only thing I would worry about is the knock on effect this will have, more so than the immediate. Less cereal does not only mean less food, but it also means less to export; generating less national income. Britain also relies on goods from other countries and we housholds will feel the pinch, trying to sustain themselves
ReplyDeleteThe points stated in the article are manifest and undeniable.
ReplyDeleteOn account of the relationship between the supply of wheat and the supply of cereal which are in joint supply (supply of one good will directly affect the supply of another good), decrease in supply of crops(e.g. wheat) due to the natural hazard directly lessened the supply of the products that derived form crops (e.g. cereal, bread). With the demand unchanged, the decrease in supply of the products that derived form crops pushed the price of that good.
Since food is a significant item in average household budgets and has a significant weight in the CPI. The increased price of food will surely cause a rise in the price index and the average households will find the cost of living is ascending.