WHAT IS 'Agflation'

Agflation is when food prices rise more rapidly than prices of other goods and services because of growing demand for crops as both food and for biofuels. The word was coined as a combination of the terms agriculture and inflation.

BREAKING DOWN 'Agflation'

Agflation occurs because demand increasingly outpaces supply. One form of inflation, demand-pull inflation, results from monetary and fiscal policies that stimulate demand to encourage economic growth.

Another form of inflation, cost-push inflation, is caused by supply shortages that increase prices. Agflation is an example of this type of inflation. As costs for agricultural goods rise, perhaps because of crop shortages, food prices increase. In addition, demand for commodities such as sugar and corn has surged even more rapidly because these products are used to manufacture alternative fuels for cars and trucks.

The Impact of Agflation on Overall Inflation

Even food crops not used to manufacture alternative fuels may be subject to inflation because of the tendency of consumers to change their buying habits. This demand substitution effect can impact all food prices.

For example, if corn is in high demand to manufacture alternative fuels, food companies may switch to other less expensive grains, such as rice or wheat, to try to reduce costs for consumers. But food-related demand that shifts to other crops does not necessarily reduce overall food prices because additional demand for what may have been less expensive substitutes still creates upward pricing pressure.

Although economists evaluate overall inflation by measuring prices, using reports such as the Consumer Price Index, the impact of inflation differs in various global markets based on specific commodities. The cost of food as a percentage of the overall cost of living is less in developed countries such as the U.S. than in less developed regions of the world.

The impact of agflation can be seen in various segments of the Consumer Price Index published by U.S. Department of Labor Bureau of Labor Statistics.

In December of 2014, for example, the Consumer Price Index rose less than one percent over the previous 12 months. But the index segment for food prices alone rose 3.4 percent during that year, while the segment measuring apparel prices actually dropped two percent and gasoline prices fell by more than 10 percent.

And data published by the Federal Reserve Bank of St. Louis on global average prices shows that in 2012 while corn prices rose 11 percent and wheat prices rose 19 percent, the price some non-food commodities had dropped, cotton by 14 percent and aluminum by 5 percent.

While overall inflation rates are commonly used to analyze the health of global economies, the growing importance of agriculture makes agflation a more essential aspect of measuring price trends.

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