Price elasticity revisited

As the gentleman at the counter of the local bodega handed over an even $5 for a gallon of milk this morning, m* wondered about a topic that has been until recently far removed from the minds of most Americans for some time - food price inflation.

The FT on Monday reports that food inflation in China may now be "structural" because of dwindling supply of agricultural land and water. Recall this was originally just a one-off pig blight. Here in the US with no pork shortages on the landscape, those of us not calculating the official CPI see higher energy prices leading to higher food prices three ways, as transportation costs, as a factor of production, and as a factor of production for competing non-food alternative energy related agricultural products.

I suspect if there is one price elasticity very much appreciated by the average person, it is that for food, and it is close to zero. We can afford just so much muddled bemusement as officials talk about one-time increases and non-core items while pointing to the hedonically adjusted prices for cable television and college textbooks that show inflation to be under control. But when you start spinning that tale on my Pathmark bill, whether you are Bill in Illinois or Wen in Guangdong, inflationary expectations start to drag anchor and the central bankers need to be concerned.

Even if you subscribe, and I do, to the significant marginal pressure on exchange rates coming from central bank portfolio target management, the market is also voting on individual central bank credibility in the face of higher global inflation. The BOE, the RBNZ, and even the 'ole ECB are winning. My bank is currently losing.