Washington Insider-- Thursday

Recent Past Not Much Guide to Inflation

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

USDA Announces Dairy Donation Effort to Start Soon

Implementation of the Dairy Donation Program (DDP) as established in the Consolidated Appropriations Act 2021 to "facilitate the timely donation of dairy products to nonprofit organizations that distribute food to persons in need and prevent and minimize food waste" will be coming soon, USDA said Tuesday.

USDA has provided an advance notice of minimum provisions to be included in the program to encourage the dairy industry to process and donate surplus milk supplies as it moves through the spring surplus milk production season.

While noting the regulations for the effort have not been published in the Federal Register, USDA laid out minimum requirements for the program that was included in law. Those minimum requirements include: 1) a donation and distribution plan must be submitted and approved by USDA; 2) the reimbursement will be at least equivalent to the minimum classified value of milk used to make the donated product on the date of manufacturing; 3) records related to donating and receiving products must be maintained and available for review and/or audit; 4) eligibility is open to dairy farmer cooperatives and processors who "account to" a Federal milk marketing order (FMMO) and donate dairy products to any private or public nonprofit food distribution entity.

The regulations for the dairy effort have also not been sent forward from USDA to the Office of Management and Budget (OMB) for the usual interagency review.

USDA Details Help For Cotton

USDA will provide approximately $80 million in additional payments to domestic users of upland and extra-long staple cotton to support textile mills impacted by the pandemic under a one-time payment program -- the Pandemic Assistance for Cotton Users (PACU) program.

The payment rate will be $0.06 per pound to domestic users based on a 3-year monthly average during 2017 through 2019, covering 10 months in 2020. The program and payment formula were established by the Consolidated Appropriations Act, 2021.

USDA will use consumption information previously submitted to USDA's Agricultural Marketing Service (AMS) by domestic cotton users as participants of the Economic Adjustment Assistance for Textile Mills (EAATM) and Special Competitive Provisions for Extra Long Staple Cotton (ELS) to determine payments.

The payments could start to go to domestic cotton users in mid- to late-April.

Washington Insider: Recent Past Not Much Guide to Inflation

The New York Times is reporting this week that keeping track of inflationary pressures is hard, and that it is important not to be fooled by reported numbers -- which are mainly backward-looking -- and "not necessarily a sign of what's ahead."

For example, the Times says we could be on the "verge of a golden era for inflation nonsense," and it suggests that its start date may well turn out to have been Tuesday morning, when new data on consumer prices were released.

Still, the concern is important and the Times says that the potential for misunderstanding derives from several forces crashing against one another at once. It expects that there are sure to be shortages of some goods and services as the economy creaks back to life.

There are growing, valid concerns for investors and policy makers since the trillions of dollars of government stimulus dollars "could push the economy beyond its limits and create a broad-based overheating." But to be a savvy consumer of economic data, it's important to separate those potential forces from the inflation data coming right now, the article says. It believes this "tells us more about the past than the future." Don't take the backward-looking information in the new report as proof that those inflation warnings are coming true.

The Consumer Price Index in March reflected a 12-month increase of 2.6%, which on its face would appear to be an uncomfortably high rate of inflation. That said, the Times notes that it had been higher than that for several 12-month periods ending in mid-2018.

But March 2020 was not a normal month. The pandemic shut down huge parts of the economy virtually overnight. It would be hard for that kind of experience not to create distortions in economic data. NYT says the term for this is "base effects" and that it is the "misleading results" that can show up in year-over-year numbers when something weird happened 12 months ago.

To get a better sense of true inflation trends, it helps to look at percent change in prices since February 2020, adjusted to reflect an annual rate instead of a 13-month rate. Using that measure, "we see a considerably more nuanced picture."

Overall consumer price inflation is running at 2.2% -- very close to the 2% that the Federal Reserve aims for, especially considering that the CPI runs a few tenths of a percent higher than the inflation index preferred by the Fed.

In the guts of the new numbers, we see how the recovery "creates distinct inflation dynamics in different parts of the economy." For example, gasoline prices are up an annualized 12.3% since February 2020 -- maybe not as dramatic as the 22.5% year-over-year price rise reported in March but still enough to suggest that people unhappy with prices at the pump have something to complain about.

Specifically, in the early months of the pandemic, energy demand collapsed and drillers of oil and natural gas pulled back on exploration accordingly. Demand for gasoline, jet fuel and other petroleum products is finally rising but energy producers can't flip a switch and produce enough fuel to meet that demand overnight and are doubtless scarred by their losses last spring.

Similarly, grocery prices are up substantially: an annualized 3.8% rise since February 2020, led by a 5.9% rise in the price of meat, poultry, fish and eggs. If it feels as if proteins are more expensive than before the pandemic, "you're not imagining it," the Times says.

Central bankers tend to look past swings in energy and food prices which tend to fluctuate in ways that don't portend inflation across the economy. But some elements of "core" inflation are also showing odd inflation dynamics, even when corrected for base effects. Used cars and trucks, for example, are up an annualized 11% since February 2020, most likely because many people sought a way to get around besides public transport.

The flip side of that is that airfares are still far below its pre-pandemic levels, down an adjusted 23.9% from February 2020. There is plenty of reason to expect that airplanes will be crowded this summer, especially on routes to leisure destinations, as a newly vaccinated population looks to stretch its wings. But prices still have not caught up to their pre-pandemic norm.

Oh, and clothing is still cheaper than pre-pandemic levels as well, with a 2.7% adjusted fall in apparel prices since February 2020.

The Times sees a lesson in the sharp divergences in these sectors and that it shows the importance of looking at economic data more deeply than usual in the coming months. Many of the sectors with the most extreme price effects from the pandemic bottomed out in April or May, not March -- meaning the distortions in year-over-year numbers could get even bigger over the next few months.

But beyond that, with so many parts of the economy going through wrenching change, headline numbers on inflation or anything else will mean less than usual in the coming months. The Biden administration and the Federal Reserve are betting on a one-time reset, with temporary price spikes followed by a steadying of both inflation and growth in 2022.

If something more pernicious arrives, it won't show up as a few weird data points in 2021, but as a broad-based surge in prices across the economy that becomes a cycle of rising prices. So, we will see. The Times warns that to understand an economy in uncharted territory, the details matter more than the headlines. This is probably good advice that should be heeded by producers as they continue to evaluate future trends, Washington Insider believes.

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