Economists utilize metrics such as the Consumer Price Index (CPI) and the Producer Price Index (PPI) to gauge inflation levels. The CPI captures inflation based on consumer prices, while the PPI does the same from a manufacturing or production standpoint. We tend to hear more about the CPI, but what does it entail? Essentially, it measures the overall cost of goods and services purchased by the average consumer, encompassing thousands of commonly bought items to form a representative basket. 

Let’s use a simple example to further illustrate the concept of CPI. Suppose a typical consumer’s basket comprise 3 dozen eggs and 2lbs of ground beef. Assume the price of one dozen eggs was $1.00 in 2018, $1.50 in 2019, and $2.00 in 2020. For ground beef, let’s assume the price per pound was $3.50 in 2018, $4.50 in 2019, and $5.00 in 2020. 

In 2018, the value of the basket would be (3 dozen eggs x $1/dozen) + (2lbs x $3.50/lb) = $10. The value of the basket in 2019 would be $13.5, and $16 in 2020. We have to designate one year as the base year, let’s say 2018. In the base year, the CPI is set at 100 (i.e., ($10/$10) x 100)). The CPI in 2019, relative to the base year is ($13.5/$10) x 100 = 135. In 2020, the CPI would be 160. 

The percentage increase in CPI relative to the previous year (or time period) represents the inflation rate. In our hypothetical scenario, inflation rate for 2019 (relative to 2018) would be (135 – 100)/100, which is 35%. In 2020 (compared to 2019), inflation would be (160 – 135)/135, or 18.5%.

The American Farmer

How does inflation affect American farmers? In several ways, actually. Farmers are both producers and consumers within their industry. They acquire various inputs like seeds, feed, fertilizer, fuel, utilities, equipment repair, and more. Consequently, rising prices lead to higher costs for these inputs, affecting their operations. Fertilizer prices in particular skyrocketed, with some farmers reporting a 300% increase in 2022 over the previous year. This implied utilizing fewer inputs or scaling back on important production practices. Moreover, inflationary pressures can lead to increases in commodity prices which may partially offset the high cost of farm production. However, this sets off a cycle where high commodity prices in turn increases demand for farm inputs. High commodity prices also make US exports less attractive, as foreign consumers require more dollars to purchase them. Amidst these price hikes, agricultural assets such as land appreciate in value. Whether this is advantageous or detrimental depends on whether the farmer owns or rents the land, with renters being more adversely affected. One of the Federal Reserve Board’s tools to combating inflation has been an increase in interest rates. However, for farmers, this translates to higher borrowing costs. Fortunately, inflation rates have been on a decline, dropping to 3.4% in 2023 from 6.5% in 2022, offering a more promising outlook compared to previous years.