The USDA reported today that severe drought in California could have a lasting impact on fruit, dairy and egg prices, and that inflation in meat prices appears poised to continue.
What’s the point? Long-term weather patterns, namely drought conditions, appear to be having an increased effect on food inflation. This is somewhat of a concern because it could spark a move to higher inflation generally. While we believe the likelihood that food price inflation will result in significantly higher general inflation is low, we note there have been periods in our history where sectoral inflation stoked a rise in general inflation, partly due to change in “inflation psychology”. We believe the probability that food price inflation would spark higher general inflation in the near term is low for a variety of reasons including demographics trends, structural issues with the labor force, and excess global capacity.
Link: http://money.msn.com/business-news/article.aspx?feed=OBR&date=20140523&id=17646363
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