3/15/2024

What is “agflation” and how does it work?

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Not only the stock and cryptocurrency markets are filled with events and news! In fact, a large percentage of the dynamics occur in the agro-futures market: soybeans show a prolonged price decline, which is why traders increase short positions, and prices for cocoa beans, on the contrary, have not stopped growing since last year. Therefore, in terms of the cost of agricultural raw materials, it is worth talking about the so-called “agflation”.

Agflation is an economic phenomenon characterized by rapid growth in food prices compared to other categories of goods and services. This trend is explained by the growing demand for agricultural products. The term “agflation” is a combination of the words “agro” (agriculture) and “inflation”, reflecting the specifics of this type of inflationary processes.

How does “agflation” work?

Agflation is a specific type of inflation that occurs when demand for food significantly exceeds supply, resulting in a disproportionate rise in prices.

There are two main types of inflation, one of which is agflation:

  • Demand-pull inflation: occurs when government policies stimulate demand, causing it to exceed supply.
  • Cost-push inflation: caused by a shortage of supply leading to higher prices. Agflation is precisely cost-push inflation.

The rise in food prices as part of agflation may be due to various factors, for example:

  • Adverse weather conditions: Crop failure caused by drought, floods or other natural disasters reduces food supply.
  • Increased demand for biofuels: The production of biofuels from crops such as soybeans, sugar and corn increases the demand for these commodities, which also affects prices.

It is important to note that agflation can have serious consequences for the economy and is extremely painful for ordinary consumers. In particular, it reduces living standards and provokes social tension.

The power of agflation

In addition to the direct use of food crops for the production of alternative fuels, there is a risk of inflationary impact on their prices due to changes in consumer patterns in the food sector. This change, known as the demand substitution effect, can lead to higher prices for all types of food.

For example, if demand for corn for ethanol production increases, food producers may switch to cheaper feed crops such as rice or wheat to minimize costs to consumers. However, shifting demand to other crops does not guarantee a reduction in overall food prices. On the contrary, the increased need for more affordable substitutes puts additional pressure on prices, causing them to rise.

Although economists measure inflation generally using consumer price indices (CPIs), the impact of inflation varies across markets around the world and depends on specific products. In developed countries such as the United States, per capita food spending is a smaller share of the total cost of living compared to less developed regions.

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