Tuesday November 27, 2007

Bread and inflation

Let's start by saying :

"Bread is an inflation indicator."

In case by any chance you don't get it, I will let BBC explain it to you :

"You can expect to find bread in almost every home in the country, which makes it a key product, " says a spokesman for The Grocer magazine. "People relate to it and everyone has a notion of what a loaf of bread costs, which is why the price is so keenly watched."

"People have traditionally used bread to gauge the cost of living," says economist Edward Dale. "If the rising costs of making a loaf are starting to show up in prices on the High Street, it causes concerns about other products. The public view bread as a general gauge for inflation." Although it is not a key economic indicator, the cost of bread is still watched by the financial markets because of its key ingredient - wheat. "Grains impact on the price of most foods," says Mr Dale. "The current rise in wheat prices is also expected to increase the price of substitutes, such as barley and corn. This would affect the price of beer and breakfast cereals.

- That was from a 9 Jan 2007 article on the BBC website. Over here in Singapore, let's see what is happening. Here is a photo of bread price tags I have been collecting. These tags indicate the price of a standard loaf of 400-gram Gardenia high-fibre white bread in blue packaging that one would expect to pay at any supermarket, provision shop, petrol station mart, or other retail outlet in Singapore.

As you can see, prices have been going up quickly. There I was, last week on a Tuesday evening, queuing up at the NTUC Fairprice supermart near my workplace, holding on to a basket containing a 2L bottle of Meiji fresh milk and 1 loaf of Gardenia high-fibre bread. I was expecting the tally to come to $6.60 ($4.60 for the milk, $2.00 for the bread), but it came up to $6.75. At first I thought that, oh, maybe the milk went up another 15 cents (which is probably a story for another time). But this time, when I finally took a look at the price tag, it was the bread that went up.

Some people, either those with a economic or trading bent, might call this a "price signal". The implication of this was literally staggering. I nearly fell off the step on the staircase. "WHAT THE (unprintable) ?!!!". That was when the notion came to me that, never mind the deflationist camp, this is inflation going exponential.

- In a rare moment with some spare time, I whipped up this spreadsheet. I have been buying this particular variant of bread every day or every other day for the past, maybe 7 years or so. It had been stable at $1.70 for as long as I could remember. So I'll call this the base price. The table quantitatively shows you exactly how much it had risen since the previous price (%, prev) and how much the price of a loaf of bread had gone up compared to the base price (%, base).

If you take a look at that last line, you will see what it was that was so staggering. I have not done the calculations prior to this spreadsheet, but here you are : it is up 7.50% compared to the previous price of $2 a loaf, itself a milestone of sorts. And it is up an earth-shaking 26.47% compared to around a year ago.

And they tell us that CPI inflation is up 3.6% year-on-year, with the food component up 4.3%. And that inflation such as it is calculated by CPI, is at a 16-year high.

Personally, I think that M3 money supply growth rate at over 20% year-on-year correlates better. Much, much, much better. But hey, there's more than enough blame to spread around. In case anyone has missed a lesson or two, typically bread is made from flour, and flour is made from wheat. So let's check out the historical wheat prices :

That is a chart of wheat futures prices. It is traded in terms of US$ per bushel. According to wikipedia, a bushel of wheat is about 60 lb or 27.215 kg. The chart is denominated in cents though, so you divide by 100.

You might have heard that the price of wheat doubled. So there it is, on the chart. In 2006, it was around $3-4 per bushel, and this year, 2007, it doubled to $8-9 per bushel. It really takes a longer-term chart to bring out this price pattern. Observe how the price remained stable at $2.50-$3 for 7 years before 2006, and then took off exponentially in 2007.

A few more years of this and they would have to start using log scale (10, 100, 1000, etc). We are probably well into the beginning stages of hyper-inflation. This is a historical photo of what hyper-inflation in 1923 Germany looked like :

Caption : Inflation 1923–24: a woman feeds her tiled stove with money. At the time, burning money was less expensive than buying firewood.

We are not at the worldwide money-burning stage yet, but if there are no major structural changes in the way our economic systems work, it looks like we could be headed in that direction.

(2007-11-27 13:38:56 SGT) [Biz] Permalink Comments [2]

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