The Truth about Inflation and Coffee

Updated: Jun 11, 2021

The #CPI numbers came out and they were high, even higher than expected. The numbers for May were an increase of 0.6% which was 50% higher than the expectation of 0.4%. Why should we in the #coffee world care?

Inflation is intimately linked with #commodity prices. As I teach in my course, when #inflation rises, commodity prices rise, and that includes coffee.

Consumer Price Index (CPI)

So is this latest CPI number really a concern?

#Forbes warned us yesterday to get ready for "Inflation 'Panic Porn'". The article rather condescendingly "debunks" the concern over the inflation that we are currently seeing. But the fact that it exists also underlines the fact that inflation has increasingly been on the financial community's radar.

The author argues (correctly I think) that the year-on-year number is going to be high because it is starting from a lower base. The reason being is that inflation rose at a slower rate (mind you it didn’t fall) around the time of the #Covid induced recession. Therefore we can see that inflation rose in a much higher rate over the last year but it was starting from the lower base (see gif above).

CPI Seasonal

The author suggests that a better measure of inflation is the Personal Consumption Expenditures (#PCE) excluding #Food and #Energy. This does indeed show a much slower rate of inflation, but the same pattern holds true. A steep angle from a lower base along with a more modest overall increase in inflation.

PCE Excluding Food and Energy

However, from our point of view in the #coffeemarket, it doesn't make sense to exclude agricultural products and energy, because coffee is an agricultural product and a commodity.

Moreover, coffee is a favorite of speculative #commoditytraders. As an aside, Coffee is often referred to as the 2nd most commonly traded after oil, which is a myth. But it is based in the truth that coffee is extremely popular as a speculative vehicle.

So it is reasonable to conclude that the CPI should probably be a cause of concern for us in the coffee market, if it is indicative of price rises in agricultural commodities.

The US Treasury Secretary Janet #Yellen says that the inflation that we see is a good thing, because inflation has been “too low", so the increased inflation now is bringing the "long-term" inflation in line with the 2% desired rate.

Regardless of how she spins it though, the fact is that prices (including coffee) are very clearly up. We can see that in commodities across-the-board. Ags, #metals and energy have all been up.

Commodities Up

We can see that the #moneysupply is also up tremendously as well so it seems strange to exclude these items from the calculation for inflation just because they are volatile.

Even with all of these mitigations, we can still see that inflation rose at a fast pace regardless. When will it stop?

The #federalreserve has committed to not raising interest rates till at least 2023. So does that mean inflation will continue at the current rate for the next year and half? That does not bode well for the economy, and it suggests an impressive rise in commodity prices, including coffee.

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