While these are indications that food inflation could possibly ease in coming months, their decline to pre-pandemic levels could be protracted as evidenced by still high prices for some other food-related products. Milk, for instance, while down marginally from its peak in May is still 41% higher from a year ago. Rice, a staple in Asia and consumed across the globe in various forms, is up 26% from a year ago, and breakfast beverage orange juice is up 34% from this time last year.

Fertilizer costs are another significant part of food production costs, along with seed and fuel (Figure 2). There are also other factors such as wages, packaging and transportation. Wages, for instance, have been rising steadily by 5% amid a tight labor market, which seems robust despite negative economic growth in the first two quarters of this year. Job openings are outpacing the available labor by about a two to one basis, while the unemployment rate at 3.5% is the lowest in about 50 years. 

Inflation, and prices of food in particular, have become a primary concern from consumers, policy makers and the Federal Reserve (Fed). Inflation soared to 9.1% in June compared to a year ago – the highest in 40 years -- fueled by lingering disruptions to supply chains that first surfaced during the height of the pandemic, and a surge in consumer demand for manufactured goods during the time of social sequestration to contain the spread of Covid-19. There was some relief when the inflation rate fell to 8.5% in July largely due to a decline in the price of gasoline. On a month-on-month basis, inflation was unchanged in July after growing 1.3% in June and 1.0% in May (Figure 3). Food costs, however, continued to climb in July, rising 1.1% month on month. Stripping away the volatile food and energy costs, core inflation rose 0.3% in July, the smallest increase since March.

To get an overall sense of inflation, let’s take a look at the components that go into the basket of goods and services that the Bureau of Labor Statistics uses to calculate changes in consumer prices. There are eight major groups, namely food and beverages, rent (including owners’ equivalent rent), transportation, medical care, education and communication (that includes college tuition, postage, computer software), apparel (including shoes and jewelry), transportation and other goods and services. Purchases of homes are considered an investment expenditure and are excluded, along with investments in stocks, bonds and business expenses.

Inflation, which had been averaging around 2% for much of the past two decades, began climbing from more than a year ago amid the pandemic, and what was initially expected to be transitory by Fed has now become persistent to the extent that the Fed has raised interest rates four times through July to rein in the surge in consumer prices. With the labor market remaining robust despite the rate hikes, the Fed is expected to raise rates by another 50 to 75 basis points during its September meeting, according to the federal funds futures market. There is another meeting of the Fed’s policy-making Federal Open Market Committee (FOMC) in November 2022. While the magnitude of any rate hike at that session would hinge on the pace of inflation between now and then, federal funds futures suggest a smaller hike in November than in September. The Fed has a delicate job at hand – beat back inflation by raising rates just enough without tipping the economy into a recession. 

Adding to the other factors stoking food inflation is the rise in prices for a range of commodities tracked to Russia’s invasion of Ukraine. Chicago wheat prices were trading at around $8 per bushel at the start of February, and by early March prices had rallied to $12.52, an increase of 56% amid concerns of supply disruptions as Russia and Ukraine are the world’s top and number five wheat exporters. Wheat prices neared $13 by May before falling below $8 in August.

Wheat prices have tumbled in recent weeks due to the United Nations brokering a deal with Russia for the resumption of Ukrainian exports through the Black Sea. There are also expectations for U.S. wheat production to be higher than last year’s despite some impact from the drought in some regions. An estimated 230 million bushels of wheat is expected to be turned into flour in 2022. Since the difference between the peak and current price of wheat is around $5 per bushel, the cost differential in the amount of wheat used to produce flour will be around $1.15 billion.

About one-fifth of the 14.5 billion bushels of corn expected to be produced this year, or 5.35 billion bushels, will be turned into livestock feed. The decline of about $2 per bushel in the price of corn from its peak is equivalent to a difference of over $10 billion in feed costs. Similarly, about half of the soybeans to be produced this year, or 2.24 billion bushels will be crushed into feed for livestock. A $1 per bushel decline translates to a difference of well over $2 billion in feed costs.

The U.S. inflation rate could also be associated with something far beyond the country’s borders – Chinese demand for commodities. Demand from the world’s second largest economy for commodities such as soybean, corn, oil and copper, among others, have a direct correlation with prices due to the amount of these products that are purchased by China. For instance, China is expected to account for 59% of all soybeans imported throughout the world in 2021/22. Hence, Chinese demand is fundamental in determining prices for a range of commodities. But the Chinese economy is weakening, with its gross domestic product growing just 0.4% in the second quarter compared to 4.8% in the first quarter. Already there are signs of weakening demand.

Food inflation remains a major concern, but the recent decline in crop prices from their peaks might offer an indication that some of the contributing factors could be on the wane, although any inclement weather during the critical period heading into harvest could turn markets around. The drop in oil prices, another key component in food prices, might also point to a case of the worst being over, but wages have been growing at about 5% -- but still lagging inflation at 9.1% -- and could add to production costs, along with other related costs such as packaging and distribution.