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Food Inflation Is the 2022 Crisis, Not Supply Chains

Food Inflation Is the 2022 Crisis, Not Supply Chains

The real trouble will start when this year’s energy crisis morphs into next year’s food inflation problem.

We’ve all become armchair inflation experts. And why not? It’s almost impossible for anyone to keep getting it as systematically incorrect as professional economists have done this year.

It’s time for the conversation to move beyond the current obsession with eye-catching headline numbers. That we’re in a global inflation regime of a kind not seen for decades, is beyond doubt.

Interest in supply chains is at a 17-year high, according to Google Trends, but it has become a red herring when it comes to forecasting the persistence of inflation.

Supply-side constraints are usually a key initial catalyst in any price spiral. And it’s intuitive that the vast majority of supply-side issues are “transitory” in nature as supply eventually responds to higher prices. So, while it’s good to know when supply-side pressures will ease, that knowledge isn’t sufficient to conclude when the broader inflation threat will pass.

What we need to establish is whether demand will take over in leading the inflation charge. And, for that purpose, inflation expectations are critical. As measured by breakeven rates, U.S. 5-year expectations have breached 3% for the first time in at least 19 years. The U.K. equivalent is well above 4% for the first time in records going back more than 25 years.

Expectations of higher inflation have the double impact of encouraging people to front-load spending, further pushing up prices, as well as the more important effect of laborers demanding higher wages, thereby both directly increasing costs and the future pool of capital allocated to demand.

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