Washington Insider-- Thursday

Thinking About Inflation

Here's a quick monitor of Washington farm and trade policy issues from DTN's well-placed observer.

Mandatory Country of Origin Labeling Still on Vilsack's Radar

Mandatory Country of Origin Labeling (COOL), implemented and ended under USDA Secretary Tom Vilsack's first round at USDA under the Obama administration. And that issue resurfaced in his Tuesday session with lawmakers.

Asked by Sen. Deb Fischer, R-Neb., about the Product of USA label deployed by USDA and whether it has evolved and kept up with consumer expectations, Vilsack said, “If it's the same policy as it was four years ago when I left, the answer is no. We made every concerted effort to try and create better transparency, better information for consumers because we understand and appreciate that consumers want to know where their food comes from. They want to know when they're buying U.S. and when they're not buying – when they're buying someplace – from someplace else.”

Specifically on COOL, Vilsack responded to Fischer and to a separate question from Sen. John Thune, R-S.D., on the topic with the same refrain: “I am absolutely willing to listen to anybody and everybody who's got an idea about how we can circumvent or how we can get to a point where the WTO doesn't necessarily slap it down that creates retaliatory impacts on… on American agriculture.”

And pushing ahead with COOL will prompt retaliation from Canada and Mexico, something Vilsack said was “not a good solution.” But any effort on the COOL front would have to be WTO compliant, he stressed.

Trump Administration's 'Terrorism' Label For Cuba Under Review

A late announcement from the Trump administration was to declare Cuba a “state sponsor of terrorism.” The Biden administration promised a review of the Trump action.

Secretary of State Tony Blinken confirmed the development in remarks with MSNBC's Andrea Mitchell.

Cuba imports about $2 billion worth of ag commodities per year, but minor amounts come via the United States. However, Cuba is the fourth largest foreign market for U.S. poultry.

U.S. rice producers have also eyed the market that is just 90 miles from the United States for their products, but have also not been able to build the market that they see possible in the island country.


Washington Insider: Thinking About Inflation

The New York Times published a retrospective on inflation this week, observing that there are growing signs just now, appearing in some business surveys, with companies looking to raise prices as they prepare for a post-pandemic economy. And they are apparent in the news media, from magazine covers to financial news segments.

But there is little evidence of “actual inflation,” the Times says. “The Consumer Price Index in December showed only a 1.4% rise in prices over the last year. And top Federal Reserve officials made clear in recent days that they (still) view too-low inflation as the bigger risk to the economy, not soaring prices.

How can one reconcile the inflation talk, with the absence of actual inflation? It's easier than you might imagine, the Times says.

It “helps to think of types, rather than a single risk ahead.” In terms of significance, these range from mere “statistical anomaly” to a “huge shift” in the global economy.

Each of these has different implications, both for how ordinary people making economic decisions should react and how policymakers, particularly at the Fed, should approach their work. One of the main concerns, of course, is that policymakers get it wrong and attempt to manage one inflation risk when another is the reality.

The signs are hard to interpret, NYT says, so it discusses simple metaphors. “If we start to see higher prices later in the year, the first thing to ask is: Is this a story of “hungry bears emerging from hibernation; the result of excess water sloshing around a bathtub; or a balloon finally being reflated after years of leaking air?”

And, there are misleading numbers to avoid. After the price of many goods and services collapsed between March and May last spring, lots of economic activity shut down. In many cases, those prices have recovered to close-to-normal levels making the basic trend lines of prices of those items appear extraordinarily high.

For quite a few products and services, those numbers might look even more extreme. The price of home natural gas service is on track to be up 5.4%, with airline fares up 16.3%, and the price of women's dresses up a remarkable 17.9% — all reflecting the deep discounting retailers were forced to do in the spring of 2020.

Those numbers appear to reflect inflation but only because of the conventions around using year-over-year data. For example, dress prices in that model might look like evidence of inflation when they are still 9% below pre-pandemic levels, the Times says.

These calendar effects don't matter in any meaningful way, and Fed officials have said as much. Beware of anyone who might seek to use these numbers to create misleading narratives about the level of inflation in the economy, the Times warns.

Also, what if “most everyone” emerges from economic hibernation at once? The supply of most services is pretty much fixed in the short run, and could be below pre-pandemic levels because of permanent business failures. This relative demand surge may lead retailers to raise prices to avoid shortages — a form of price inflation that also can happen through non-obvious ways, such as if a retailer that in normal times routinely offers 20% discounts stops doing so.

This is another classic example of an inflationary surge that central bankers need to mostly ignore — to look through to longer-run trends. Price increases are how “the economy allocates a limited supply and encourages producers to invest in greater supplies. The price spikes may be a sign of the economy healing, not cause for inflationary panic.

Then, the Times points to a number reported last week that “you might have missed.” JPMorgan Chase said its total deposits were 37% higher in the fourth quarter than a year before, a rise of $582 billion. It says this is a shocking rise in deposits, “but not exactly surprising if you've been following the economic data.”

From March through November, Americans saved $1.56 trillion more than they did in the same period of 2019, reflecting a pullback in spending combined with federal spending that, in the aggregate at least, offset the loss of income from job losses.

That is an enormous amount of money sitting in savings. So what happens if everybody starts spending at once, NYT asks. It's entirely possible that, as people become more confident, all that money could easily boost demand for goods and services until it outstrips supplies.

This could be more like what happened in the 1960s, when a combination of high domestic and wartime spending pushed the economy to its productive limits. That created remarkable income growth for Americans but by the end of the decade inflation was rising and would become a major problem in the 1970s.

Thus the Fed will have to decide whether what's happening is a desirable and long-awaited heating up of the economy, or something that's likely to spill out into sustained inflation. Fed Chair Jerome Powell has said he does not believe a 1970s-style inflationary cycle is likely. “Given the inflation dynamics we've had over the last several decades, just a single price-level increase has not resulted in ongoing price-level increases.”

In addition, over the last three decades or so, the world economy began to work differently in nearly all advanced nations. The cause likely includes demographic shifts, the entry of billions more workers into the economy and a worldwide glut of savings. The basic story also would focus on the rapidly rising supply of labor in recent years as new technologies diminished the bargaining power of workers, holding down wage inflation.

So, we will see. These are important questions that affect nearly all policy debates, especially those related to massive economic interventions. Certainly, producers should watch these closely as they proceed, Washington Insider believes.

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