What Is Agflation?
Agflation describes the phenomenon when food prices rise more rapidly than the prices of other goods and services, due to the growing demand for crops as both food and for biofuels. The word is a combination of the words "agriculture" and "inflation."
- Agflation occurs when food prices increase at a greater rate than the prices of other goods and services in an economy.
- When agflation is high, a greater amount of household income is required for food and agricultural products.
- While general inflation rates are commonly used to analyze the health of global economies, the importance of agriculture makes agflation an essential aspect of measuring price trends.
Agflation occurs because demand increasingly outpaces supply, raising the price to "inflated" levels. 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 due to bad weather affecting the harvest, food prices increase. At the same time, demand for certain commodities such as sugar and corn has surged even more rapidly, as technologies using these products have been increasingly applied to manufacture alternative fuels for cars and trucks.
The Impact of Agflation on Overall Inflation
That being said, 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. As a result, this demand substitution effect can impact all food prices.
For example, if corn is in high demand to manufacture alternative fuels such as corn ethanol, food companies may switch to other less expensive feed 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 lower overall food prices. The additional need 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 (CPI), 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.
Consumers Feel the Pain of Agflation
The impact of agflation appears in various segments of the Consumer Price Index published by the U.S. Department of Labor Bureau of Labor Statistics (BLS).
For example, when looking at the 12-month percentage change as of August 2020, the CPI rose 0.4 percent, less than one percent. In comparison, food went up 4.1 percent or 10 times more. In the same time period, energy went down 9 percent while all items minus food and energy only rose 1.7 percent.
While overall inflation rates are commonly used to analyze the health of global economies, the growing importance of agriculture makes agflation an essential aspect of measuring price trends, and the ability to feed a growing world.