The issue of inflation looms large as the Federal Open Market Committee (FOMC) -- the Fed's decision-making body -- concludes its two-day meeting Wednesday afternoon. And the topic of inflation has been one that continues to dominate a lot of attention throughout the country as consumers are seeing higher prices for several things, including food and fuel.
USDA recently updated its food price inflation outlook, but surprisingly did not raise its current expectations for prices. USDA maintains an outlook for all 2.5% to 3.5% in 2021, with food at home (grocery store) prices seen rising 2% to 3% in 2021. Restaurant prices, food away from home, are forecast to gain 3% to 4% from 2020 levels.
All three forecasts were steady with the prior month. That is somewhat surprising since USDA often times has made changes to its overall outlooks in July.
But prices this year are seen above the 20-year average, and come after upward revisions made in their forecast last month. But consumers are coming off a period of extended favorable prices at the grocery store.
Until 2020, prices had either risen far less than their 20-year average or had falling in two years going back to 2016. But after such a favorable run, it's no wonder that the food price inflation situation is of concern to consumers.
After all, the pandemic caused food price inflation to push even higher in 2020 compared with the forecast levels for 2021. As COVID vaccines have been given and restrictions have been lifted, consumers have been ready to get out and eat out more than they were able to for much of 2020 -- restaurant prices were up 4.2% from June 2020.
Food is one of those categories that is excluded from the Fed's favored inflation gauge -- Personal Consumption Expenditures (PCE). It is a broader reading than the Consumer Price Index (CPI) and still their favored PCE data is the one that strips out food and energy, the so-called core rate.
So what the Fed says about inflation when the meeting concludes Wednesday afternoon will be notable. They have insisted for months when each policy meeting has wrapped up that they see the higher prices as "transitory" and that they will not become established enough or significant enough to prompt a Fed response like raising interest rates.
The Fed has also been buying Treasuries and mortgage-backed securities at a pace of $120 billion per month. The concept is that buying those bonds will lower borrowing costs for consumers and businesses, and keep economic activity moving forward as we recover from the pandemic. But one of the first policy moves they will take is to "taper" those bond purchases. Fed Chairman Jerome Powell had insisted until the June meeting that it was too soon to "talk about talking about" tapering those bond buys. But after the June meeting, he acknowledged that "talk" had begun.
Expectations are that they will not have completed that discussion. But attention will be on whether or not Powell signals that they are close to a decision. That could prompt some market concerns as it will mark the start of the ending of the easy money policy by the Fed. Even so, Powell has promised there will be plenty of notice when the tapering of those bond buys start so the market will not get spooked. Still, even with all kinds of notice, some are likely to get spooked anyway.
So we will see. As the Fed moves closer and closer to removing some of the easy money from the market, it will prompt response higher in interest rates and that will start to add another cost factor in for agriculture that needs to be watched very closely, Washington Insider believes.