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Source: U of Illinois news release

To view the complete report, click here.

Spikes in retail food prices during the early phase of the COVID-19 lockdown were a major concern of consumers and policymakers. Fortunately, the price spikes generally did not last past the summer of 2020 as bottlenecks in processing and transportation eased.

This, however, was not the end of concerns about food price inflation in the U.S. and around the globe. New concerns have arisen as grain and oilseed prices surged starting last August. One issue is that there appears to be a great deal of confusion about exactly what "food price inflation" represents. Hence, the purpose of this article is to present the basic facts on food price inflation at different levels of the food supply chain for the U.S.

We begin the analysis by examining recent trends in one of the most popular indexes of food prices. This is the Food Price Index computed by the Food and Agricultural Organization (FAO) of the United Nations. It is referred to frequently in media coverage of food prices. There are several facts about the FAO Food Price Index that are important to consider. First, it is based on export prices at major global locations for trade, such as the U.S. Gulf and Brazilian ports. Second, the export prices are then averaged to form sub-indexes.

Third, the commodity group sub-indexes are then weighted by trade shares to compute the overall Food Price Index. The current base period for the trade shares and the FAO Food Price Index is 2014-16. The key thing to recognize is that the FAO Food Price Index represents the prices of raw agricultural commodities near or at the first handler level in the food supply chain.

Figure 1 shows monthly levels of the (nominal) FAO Food Price Index over January 1990 through February 2021. What stands out are the spikes in the Food Price Index in 2007-08 and then again in 2010-11. There has indeed been a surge in the Food Price Index in recent months. The most relevant measure of the recent run-up in the index is to compare February 2021 with February 2020 in order to eliminate the distortions caused by the pandemic in the first half of 2020. The February 2021 level of the Food Price Index was 116, which was up 17 percent versus the previous year. This is certainly a substantial increase but it only takes the index back near the level of 2014 and still well below the peaks in 2007-08 and 2010-11.

Figure 2 presents the monthly history of the sub-indexes for meat, dairy, cereals, oils, and sugar over January 1990 through February 2021. While there is certainly variation across the sub-indexes, the trends in the sub-indexes are broadly similar. This is also evident in cross-correlations between the monthly index observations, which range from 0.63 to 0.93. This is not surprising, as it is well-known that agricultural prices are often driven by similar underlying supply and demand fundamentals.

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