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Food & Energy Prices Are Spiking

By Richard "Crit" Thomas, CFA, CAIA
Economy & Markets
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Grocery cart in grocery aisle

Food and energy prices are spiking and are likely to remain high assuming extended sanctions on Russia. What might that mean for inflation and spending on other items? Fuel spending as a percent of total is relatively small (2.5% as of 4Q21) and has been trending down over the last decade. This measure would certainly differ by income level. The decline in fuel spending is mainly due to incomes growing faster than fuel prices, as well as, more energy efficient vehicles. Rising fuel prices will impinge on consumers’ budgets, but is a relatively small portion of those budgets. Additionally it is important to consider the economic offset of energy production here in the U.S., which benefits from higher prices.

Food takes up a larger portion of consumers’ budgets, almost 8% as of 4Q21, and this only counts food-at-home spending. Still, this number greatly overstates the value of the agricultural input to this spending. Recently economist Ian Shepherdson shared a surprising perspective on how little grains contribute to food prices. At the time of his analysis, a 14oz box of Wheat Chex sold for $4.59. Wheat makes up 90% of the food content, but just 3.9% of the purchase price (just 18 cents). What? Most of the price is production, packaging, distribution, marketing, and profits collected from the manufacturer, distributer, wholesaler, and retailer. Therefore, if wheat prices were to double, the price of the Wheat Chex would rise by less than 4% (all else being equal). Alternatively, consider corn. For a 12oz bag of frozen corn purchased at $1.99, the cost of the corn is only about 10 cents. If corn were to double in price, it would raise the price of the bag of corn by just 5% (all being else equal).

Higher food and energy prices have and will likely continue to add to inflation and divert spending away from other goods and services. This economic situation is a net negative for our economy (at the margin) and markets have reflected that. Nevertheless, we believe these economic sanctions are unlikely to throw the economy into a recession, as the impact is just too small. Admittedly, the risk of recession has risen when combined with other risk factors, but it is like the equivalent of moving from 5% to 15%. It does put the Federal Reserve Board (Fed) in an even more difficult position as these are supply driven price increases and are not something the Fed can address with monetary policy. Yet, there are demand driven elements to inflation that we believe the Fed does need to address. Even so, interest rates have already moved up in anticipation of the Fed raising rates, meaning the impact is already being experienced. 

The information provided represents Touchstone's views and observations regarding past and current market conditions and investor behaviors. The information and statements provided here are believed to be true and accurate. There can be no assurance however that the beliefs expressed herein will be consistent with future market conditions and investor behaviors.

This commentary is for informational purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy or a recommendation to buy, sell or hold any security. Investing in an index is not possible. Investing involves risk, including the possible loss of principal and fluctuation of value. Past performance is no guarantee of future results.

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crit thomas global market strategist

Richard "Crit" Thomas, CFA, CAIA

Global Market Strategist
Crit is responsible for examining and evaluating economic conditions, generating insights and providing a sharpened perspective on investment strategies for enriched portfolio construction.