Surging Soft Commodity Prices Add to Inflation Woes

September 25, 2023

Surging prices among a handful of commodities are stretching consumer budgets and further complicating the Federal Reserve’s fight against inflation.

“Soft” commodities are those that are typically grown rather than extracted from the earth like “hard” commodities. These are typically used in food, and a raft of weather-related damage has tightened supplies, meaning higher costs at the grocery store.

Futures contracts for orange juice, live cattle, cocoa, and raw sugar have all reached their highest levels for the year this month, with some breaking all-time records.

The S&P GSCI Softs Index, which tracks prices for soft commodities, has jumped more than 18% this year. Raw sugar and cocoa are trading at the highest levels in more than a decade. Orange juice futures hit a record-high of $3.50 per pound this month in the aftermath of hurricanes last fall hitting Florida, the primary producer of orange juice in America. Foreign supply has also been hampered by warmer temperatures in Mexico and Brazil making harvests more difficult.

Live cattle prices also hit an all-time high of $1.92 per pound. High meat prices are being driven by higher labor and fuel costs, as well as a prolonged drought in the midwest earlier this year that damaged grasslands and hay crops, leading many livestock ranchers to cull their herds. The Department of Agriculture estimates that it may take until 2026 before supplies are rebuilt.

This has implications for the Fed. Economists generally tend to give more weight to “core” inflation readings, which exclude volatile components like energy and food. This means that consumers may be experiencing higher prices than are taken into consideration by the Fed.

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