Commodity prices signal the FOMC can—and should—cut interest rates
August 18, 2024
Key Observations:
With Jul-24 U.S. PPI and CPI data in hand and the Federal Reserve’s annual Jackson Hole conference mere days away, we revisit the price of potato chips. This signal consolidates valuable cost information from across at least a dozen commodity markets.*
The bottom line: commodity prices now signal that the FOMC can—and should—ease interest rates.
The BLS data show the average U.S. retail price of potato chips in July 2024 marked its largest decline (–2.4% YoY) since April 2017. Last month was only the second month in the past three years to show a YoY decline. The other was April 2024 (–1.8%). This means two of the past four months (50% of recent sample) account for all of the YoY declines that have occurred with about 5% frequency since July 2021.
This development is evidence of the restoration of price stability, albeit at a price level (for now) 50% higher than before. It’s a crunch even if it still bites.
This quieting of price instability in potato chips reflects a broader quieting of retail price instability worldwide, albeit at higher price levels than before. In the heatmap below, we plot YoY changes in CPI readings for the 34 of 38 OECD countries for which we have monthly (rather than quarterly) data, then orient the exhibit so that the past decade of dates line up with our potato chip chart. The hot mess of price instability from 2021 into late 2023 is evident. So is the recent progress that supports rate cuts.
Source: BLS, OECD, Blacklight Research. * We find the price of potato chips to be a useful, one-stop indicator for broader commodity cost and price trends. Production costs for a bag of potato chips include expenses for biaxially oriented polypropylene (inside lining of the bag), low-density polyethene (a middle layer), Surlyn® (a branded thermoplastic resin for the bag’s outer layer), nitrogen, potatoes, salt, spices, sunflower oil, water, natural gas, and diesel fuel. **There are 38 OECD member states. This exhibit excludes the four for whom we have quarterly data only (Australia, Chile, Costa Rica, New Zealand). Fun fact: the first recorded recipe for potato chips appears in an 1817 cookbook (The Cook’s Oracle) authored by the aptly-named chef William Kitchiner.
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