Agflation: What It Means, How It Works, Impact

What Is Agflation?

Agflation describes the phenomenon when food prices rise more rapidly than the prices of other goods and services, due to the growing demand for crops as both food and for use in biofuels.

The word is a portmanteau of the words "agriculture" and "inflation."

Understanding Agflation

Agflation occurs because demand increasingly outpaces supply, raising the price to "inflated" levels. One form of inflation, demand-pull inflation, results from monetary and fiscal policies that stimulate demand to encourage economic growth.

Another form of inflation, cost-push inflation, is caused by supply shortages that increase prices. Agflation is an example of this type of inflation. As costs for agricultural goods rise, perhaps because of crop shortages due to bad weather affecting the harvest, food prices increase.

At times, demand for certain agricultural commodities such as soybeans, sugar, and corn has surged even more rapidly, as processes and technologies using these products have been increasingly applied to manufacture alternative fuels (i.e., biofuels) for cars and trucks.

The Impact of Agflation on Overall Inflation

Even when food crops are not used to manufacture alternative fuels, their prices may be subject to inflation because of the tendency of consumers to change their food buying habits. As a result, this demand substitution effect can impact all food prices.

For example, if corn is in high demand to manufacture alternative fuels such as corn ethanol, food companies may switch to other less expensive feed grains, such as rice or wheat, to try to reduce costs for consumers. But food-related demand that shifts to other crops does not necessarily lower overall food prices. The additional need for what may have been less expensive substitutes still creates upward pricing pressure.

Although economists evaluate overall inflation by measuring prices using reports such as the Consumer Price Index (CPI), the impact of inflation differs in various global markets based on specific commodities. The per-capita cost of food as a percentage of the overall cost of living is less in developed countries such as the U.S. than in less developed regions of the world.

Consumers Feel the Pain of Agflation

The impact of agflation appears in various segments of the Consumer Price Index published by the U.S. Department of Labor Bureau of Labor Statistics (BLS).

As an example, when looking at the 12-month percentage change from November 2019 to November 2020, the CPI rose 1.2 percent. Broken down by segment, food prices went up 3.7 percent—or three times more than the overall CPI. In the same time period, energy went down 9.4 percent while all items minus food and energy only rose 1.6 percent.

While overall inflation rates are commonly used to analyze the robustness of global economies, the persistent importance of agriculture makes agflation an essential aspect of measuring price trends, and the ability to feed a growing world.