Wednesday, April 16, 2008

Three more questions about inflation

In response to my previous post to reporter and fellow Grinnellian, Courtney Sherwood, asks three more questions. Let’s take them one at a time.

* How is inflation being experienced now? (In this community, across the U.S., around the globe.)

Inflation is being seen mostly through increases in food prices energy. Food prices for basic staples have increased about 50-100% and energy prices about 20% for gas.
In the US and Europe households spend less than 10% of their budget on food. So what happens when food prices go up. Not a lot, people reduce spending in other ways, save less, or shop at Walmart instead of Whole Foods (as this article in the economist suggests).


Around the globe, in the typical developing country food spending can be anywhere from 50-80% of the household budget. Protest over rising bread prices are occurring in Egypt and India. In Egypt as highlighted in this economist article, lines are getting out of control and causing violence. The problem is well summed up by a Egyptian who was interviewed by the story.
“I don't want a car, I don't want cinemas, I don't want to eat Kentucky chicken,” declared Masoud Hafez, an electrician who has worked in the factory for 28 years, brandishing a monthly pay-slip of 249 Egyptian pounds ($46). “I want bread for my children.”


* What is causing it?
Focusing on the high food prices. Increased demand for food from growing Asian economies. The increase demand for grain for biofuels due to high oil prices. Droughts also seem to be impacting the ability of farmers to produce. (another economist article)


* What should we do in the face of rising inflation, as individual consumers?
Not a lot individual consumers can do. As basic economic theory shows usually individuals can’t impact prices. Filling the pantry with some pre-package foods might help or even starting your own garden. You might need to shift your food budget around.

For long term savings I-bonds might be a more attractive investment, although the stock market should figure inflation into prices.

Finally, I would like to note I found all the articles for this post in the Economist Magazine, if you want to keep up to date on how inflation may impact you, that is probably the best source.


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1 comment:

Courtney said...

Thanks, Seth. On the buying now instead of waiting until later front, my husband and I have recently made some rather spendy electronics investments (electronic keyboard, external hard drive, Nintendo Wii and associated games). We really bought this stuff because we wanted it and had saved up the cash, but I keep jokingly telling myself that it's probably the best use of my money right now, assuming electronics prices may be rising at a faster rate than the interest rate I can get on my savings. Better to buy now than pay more with less valuable cash in the future.