Emerging Markets / July 21, 2016

Agricultural Investments Help Control Inflation

What is the Consumer Price Index?

The Consumer Price Index (CPI) is an economic indicator of national, or even regional, inflation. The CPI is usually measured in urban areas by calculating the periodic price variation on a predetermined basket of everyday goods. The traditional CPI basket features items such as milk, bread, soap, clothing, and gasoline. Furthermore, the CPI can be broken up into categories. These categories include food & beverages, housing, apparel, and transportation, amongst others. Measured several times throughout the year, the CPI gives an insight into inflation and cost of living in particular cities as well as countries as a whole.

CPI versus Core CPI

Generally, in western countries, the food & beverages category of the CPI represents approximately 15% of the total goods and the transportation category represents a similar percentage. Together, these two categories account for 25-30% of the total within the CPI sample basket. In the case of the United States, when compared side by side over the last six years, the Food & Beverages CPI category has consistently presented higher inflationary growth than the overall CPI. This contrast indicates, amongst other things, a higher demand for food and beverage consumer goods that is not being efficiently met by the available supply.

When measured by themselves, the Food & Beverages alongside the Transportation categories consistently represent higher inflation and volatility than the overall CPI. Thus, there is a distinction between overall CPI and Core CPI, which excludes food and fuels. Even though the case presented above is that of the United States, this phenomenon is also current in the European Union. For example, one of the recent metrics publicly released by European Union authorities is that of 1% percent inflation according to Core CPI. However, the percentage is certainly higher, more volatile, and likely off target when the food and energy indexes are added to the calculation.

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The Need to Invest in Food & Agriculture

Clearly, the food & beverages category, as well as the energy sector, represent the most volatile elements of the CPI. Thus, they are today’s leading drivers of inflation in Western economies. Investments in the food and agriculture industry will provide a greater goods supply in order to meet the growing demand of world markets. Such investments include farm automation, precision farming solutions, crop protection systems, and other emerging technologies as well as farmland and crop expansions. Likewise, increased trade and overall agricultural production will lead to lower prices and help control inflation. Furthermore, the food and agriculture industry also provides alternative biofuel and energy sources; thus, presenting a unique opportunity to combat inflation and spur economic prosperity.

(Read more about how Foreign Investments Boost Competition and Free Markets)