Skip to main content

April 1983, 
Vol. 65, No. 4
Posted 1983-04-01

Why Do Food Prices Increase?

by Michael T. Belongia

Michael Belongia discusses the various explanations that have been offered to account for increases in food prices. Many popular explanations (for example, unionization, price supports and “middlemen”) fail to distinguish between relative prices and nominal (or money) prices. Taking this distinction into account, the author analyzes graphically the different patterns of price behavior that would be observed under each type of price change. Plots of actual data suggest that most of the recent changes in food prices have followed a path similar to that for changes in the nominal prices of other goods. Therefore, models that explain isolated changes in relative prices are of limited use, at best, in explaining ongoing changes in nominal food prices. A statistical analysis of food prices from 1960 through 1982 shows that the primary cause of changes in the food component of the consumer price index (CPI) has been the past growth of the money stock. Belongia’s analysis thus indicates that, while many of the current explanations are inconsistent with the actual behavior of food prices, the rate of increase in the food component of the CPI in the current quarter shares an approximate one-to-one correspondence with the rate of growth of the money stock over the previous four quarters.