Inflation is Coming - 4 Reasons Why, and How to Prepare
Submitted by JMB Financial Managers on November 17th, 2020
The price of food has hit the highest levels since 1974. US consumers are beginning to face the worst bout of food inflation in decades. As an American, you are accustomed to living in the land of plenty but you could be facing issues with food supplies in the coming years. This is likely to put a crimp in your household budget.
- The Labor Department recently reported that the price consumers paid for groceries jumped 2.6% in April. This was the largest one-month pop since February 1974.
- The price of meats, poultry, fish, and eggs rose 4.3%. Cereals and bakery products advanced 2.9%. Fruits and vegetables climbed 1.5%.
- The grocery numbers are inconsistent with the broader inflation trends, which have been falling.
While the prospects for food inflation look daunting, there are things you can do to prepare. This post will provide seven actionable steps you can take to prepare for what lies ahead.
Let us begin by looking at the causes of the problem to begin with.
The Causes Behind Rising Food Prices
The increases in food prices have already taken effect in 2020. Things are not likely to improve in the near future for several reasons: economic recovery, severe weather, COVID-19, and large agricultural purchases by China.
Economic Recovery
As the country recovers from the coronavirus lockdowns, a return to more normal economic activity has occurred. US GDP grew more than 30% in the third quarter of 2020, led by consumer spending.
One segment of consumer spending, the restaurant industry, has seen a significant increase in patronage. This has increased the demand for food because consumers tend to eat more food when dining out than at home. They also waste more, unfortunately.
Additional economic improvement will create more food demand as more people return to restaurants. This will cause significant pressure on natural resources.
Severe Weather
Weather problems have occurred around the world in 2019 and 2020 causing significant crop damage:
- Australia, Brazil and Ukraine have experienced very dry weather.
- Florida, Texas, and Mexico have endured flooding at the same time.
These events have decimated the supply of wheat, corn, soybeans, and many types of produce.
As the supplies of wheat have decreased, ranchers have had to respond by reducing their herds. There are fewer cattle, pigs, and chicken as a result.
The Coronavirus
COVID-19 restrictions have caused the delivery of foods supplies to slow, as well as the outright destruction of some crops:
- Farmers are a relatively older population. In fact, 26% are age 65 years and older. Since the virus has a larger impact on those in their age bracket, some farmers shut down or scaled back operations during the lockdowns.
- The supply of farm workers has shrunk as some have contracted the virus, while others have remained at home to care for sick or elderly family members and to educate their children. The higher levels of absenteeism lead to lower production.
- Food distribution is less efficient because of efforts to reduce the spread of the virus. Transportation, processing, and storage are operating well below capacity.
- Utilities, including electricity, natural gas, propane, and diesel have been negatively impacted based on lack of availability.
Whether the result is a slowdown in deliveries or a reduction in supplies, the coronavirus has negatively affected the food chain.
China’s Agricultural Purchases
China has the world’s largest population. It also has the need to feed more people than any other country on earth. The geography of the country limits its food production; therefore, China is reliant on the rest of the world for food.
As such, China committed to purchasing $12 billion of agricultural goods from the US in 2020 and another $19.5 billion in 2021. This has created a paradox of more demand during a time of lower supply.
Prepare and Prosper
Here are some steps for responding to these aforementioned factors affecting food supplies:
On a lifestyle level:
- Add some extra canned or dry foods to your grocery list. Doing so before prices increase significantly will ease the impact on your budget.
- Grow some of your own food in a home garden. This will not only save you money but will also contribute to a much healthier diet.
- Take advantage of sales and coupons. Foods that are on sale will maximize your dollars.
On a personal financial level:
- Fortify your emergency fund. In the event you ever need to tap into your savings, more is better. It could also prevent you from taking on debt.
- Re-evaluate your spending. Shift money from less essential items to your food budget. Allocating more money for food will help you absorb food price increases more easily.
- Invest in agriculture or the food industry. As groceries increase in price, the value of these commodities and the companies that provide them may also increase.
- Hedge against inflation. Consider investing in treasury inflation protected securities (“TIPS”) or precious metals like gold and silver. You may be able to offset some, or all, of the increase in food prices with an increase in the value of your investments.
Opportunities for investing in commodities and the companies that produce them, include, but are not limited to, exchange traded funds (“ETFs”), mutual funds, stocks, futures, and options.
A Final Word
Food price inflation is about to have a tremendous impact on our day-to-day lives. It is impossible to know how long the price increases will last or how much of an effect they will have on the economy. On the other hand, you do have the ability to prepare, and even prosper, if the problem worsens in the years ahead.
Take Action Now
Protect yourself and your family by speaking to our Certified Financial Planner® about strengthening your emergency fund, re-evaluating your budget, or the merits and risks of adding commodities or agriculture-related stocks to your portfolio.
If you are not ready for a consultation, be sure to subscribe to our blog, where we will continue to discuss this issue and other relevant financial matters.
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About the Author
Jack Brkich III, is the president and founder of JMB Financial Managers. A Certified Financial Planner, Jack is a trusted advisor and resource for business owners, individuals, and families. His advice about wealth creation and preservation techniques have appeared in publications including The Los Angeles Times, NASDAQ, Investopedia, and The Wall Street Journal. To learn more visit https://www.jmbfinmgrs.com/.
