Food price inflation is driven by more than supply chain problems

Pat Westhoff
Pat Westhoff

Food price inflation was higher in 2021 than in any year since 2008. The December consumer price index (CPI) for food was up 6.3 percent from the same month in the previous year. Meat prices led the way, with beef prices up a remarkable 18.6 percent.

It wasn’t just food prices that increased in 2021. The overall CPI increased 7 percent over the course of the year. Higher prices for fuel, used cars and much more pushed inflation far above the 10-year average of less than 2 percent.

Much-discussed supply chain issues have certainly been part of the problem. Plant closures and critical input shortages have increased the cost of producing and marketing a wide range of goods and services.

Labor costs have been an important factor. Although the unemployment rate has dropped sharply since the early months of the pandemic, there are still fewer people working than in early 2020. Some workers retired early, and the pandemic has increased the risk of working and disrupted childcare plans.

Combined with reduced immigration, the result is a mismatch of labor supply and demand. Employers have to pay more to fill positions, or accept less qualified workers.

The CPI for food consumed away from home increased by 6.0 percent over the last year, as higher wages have increased the cost of operating restaurants and dining halls.

These supply side concerns certainly have contributed to food inflation, but much of the story is on the demand side of the picture.

The meat sector is an example of the importance of both supply and demand factors. Pandemic-related packing plant disruptions and concerns about competition in an industry dominated by a few processing firms are often used to explain the wide gap between what producers are paid for cattle and hogs and what consumers pay for meat.

However, those supply side issues do not explain much of what we saw last year. Consumer meat prices were up sharply, by an average of 12.5 percent from December 2020 to December 2021.

Normally, one would expect such a sharp increase in prices to correspond with a reduction in the quantity demanded. To sound like an economist for a second, we normally expect demand curves to slope down.

However, that’s not what happened in 2021. Instead, meat consumption per person was almost exactly the same in 2021 as it was in 2020. Beef and chicken consumption each increased a little, while pork and turkey consumption fell slightly.

The combination of much higher prices and flat consumption implies that consumer meat demand must have been very strong in 2021. Consumers may have complained, but at the end of the day, they continued to buy higher-priced meat.

Economists can argue about the source of this demand strength. Increases in disposable income clearly played an important role, as people went back to work, as wages increased and as some government transfer programs continued.

I also suspect that continued constraints on other activities may have played a role. Some people remained cautious about taking vacations, going to the movies, leaving more money to buy stuff — including food.

You might have predicted that an economist would tell you that future food prices will depend on both supply and demand factors.

Pat Westhoff is director of the Food and Agricultural Policy Research Institute at the University of Missouri and a professor of agricultural and applied economics. The opinions expressed here are his own and do not reflect official positions or endorsements of the University of Missouri.

This article originally appeared on Columbia Daily Tribune: Food price inflation is driven by more than supply chain problems