Did the July FPI tell us food price growth was starting to cool?

According to this Herald article the fact that annual food price growth fell from 8.2% to 7.6%, and the fact that increases stemmed from a lift in fresh vege prices implies that food price inflation is now cooling. Lets investigate this claim a little bit. (Note: I am ignoring the title “Relief on way for families as record food costs set to ease” as it is just silly – the economist they interview says food price growth will ease to 4%, not that the actual cost is going to ease.)

First the fresh vege claim. Lets try to remember here the the food price index is not seasonally adjusted. As a result there is an increase in these vege prices every July. To account for the seasonal pattern we can compare how much vege prices were up on a year earlier – in June they rose 8.7%, in July 5.4% (source). As a result, blaming vege’s for the increase in the food price index seems a little dishonest.

Now that we know this, we can just discuss the deceleration in annual food price growth.

Just comparing June to July does not give the whole story – to put it in context lets look at food price growth since 2003.

Interesting – so in May, annual food price growth was 6.8%. Furthermore, this series is not usually very persistent – as food prices are relatively volatile. So shifts up and down by a magnitude of about 0.6 percentage points are fairly common.

This tells us that the single data point in July indicates virtually nothing about what is happening to overall food price growth – we cannot conclude from this single data point that food price growth is about to fall of the boil.

Furthermore, this time last year there was a sudden, very large increase in food prices – when this fell out of the data, annual growth was bound to fall. This is because food prices change irregularly – however, when they do change, many of them will change at once – this is why the series looks so jumpy.

So is food price growth going to stay at this rate?

My criticism in this piece was based on the conclusion that “annual growth fell – therefore it will keep falling”. However, I do think that Nick Tuffley (ASB Chief Economist) is right when he says that food price inflation is likely to cool over the closing half of the year.

The spot price of a number of soft commodities (wheat, rice etc) has fallen rapidly over the past month – in tandem with falling oil prices. This is bound to feed into food price inflation over the remainder of the year. However, I would also note that a falling exchange rate will help to push food prices up – implying that annual food price growth will stay up.