Rising prices at the gas pump, combined with soaring shopping bills at the supermarket, are having a noticeable impact on the consumer's pocketbook. But what's worse is that higher prices in oil beget higher prices in food in the future. Here's why.

 

Historical economic studies tell us that energy prices have a significant impact on food prices with 64.17 percent of changes in food prices explained by the movement of oil prices. But that only tells half the story. As energy prices climb, inputs to farm production are also impacted. Fertilizers, for example, account for between 33 percent to 44 percent of operating costs. 

 

The production of fertilizer and its inputs (such as nitrogen, phosphate, and potash) requires substantial amounts of energy, which increase the selling costs to farmers. Fertilizer prices are now the highest in decades. To make matters worse, the prices of fertilizer and its inputs continue to see dramatic increases, rising as much as 18 to 26 percent during the last month alone.

 

Obviously, energy in the form of diesel, gasoline, and electricity is also a direct input cost to the agricultural sector. It is critical to running and maintaining the myriad machinery required to plant, grow, harvest, and transport food products to market.

 

In addition, the explosion of greenhouse growing of vegetables has also been hit hard by higher energy costs. That is no surprise, since this is an extremely energy-intensive area. And as energy prices continue to climb, more farmers have shut down their greenhouses, reducing crop production even further.

 

Higher energy prices have also prompted farmers to switch more of their fields from food production to making biofuels. As more and more acreage are switched to soybeans and corn (key inputs in biofuels), there is less acreage devoted to other crops. That leads to less supply and higher prices for everything from wheat to livestock feed.  

 

The United Nations index of food costs has climbed by a third over the past year. This has led to a decade-high jump in global food prices at a time when the world is contending with its worst hunger crisis in 15 years. As readers may be aware, this energy/food issue is being aided and abetted by worker shortages, supply chain issues, and weather calamities such as flooding and drought. This is particularly bad news for poorer nations that are dependent on imports.

 

It is currently harder to buy food on the international market than in almost every year since 1961, which is when the U.N. record keeping began. The only exception was the period 1974-1975. That is no coincidence, since the OPEC-driven oil price spike of 1973 spawned the rapid inflation that impacted food prices.

 

To give you an idea of how food stuffs are climbing throughout the globe, in September 2021, alone, the U.N. food index rose 1.2 percent. Grains jumped 2 percent, driven by wheat, which has been hit by drought in North America and Russia, the world's largest producers. Sugar, a big Brazilian export, also saw big price gains. These price hikes are boosting import bills for buyers around the world. Competition for additional food supplies is also adding upward pressure to prices as well.

 

Most of us here in the United States are at least able to afford the twin increases in fuel and energy for now. However, there is a time lag between the recent price spikes in the oil and agricultural markets and how long it will take to filter through to grocery stores. In the meantime, keep an eye on the oil price as an indication of where your grocery bill will be going into the weeks and months ahead.

 

The Federal Reserve Bank signaled an all-clear for the financial markets this week. The tapering they promised will begin on schedule, but Fed Chairperson Jerome Powell has no plans to raise interest rates until at least some time next year.

 

The announcement was met with relief. Investors reacted by catapulting the stock market to yet another higher high. Bond traders were somewhat mollified, as well as seen by the lack of movement in interest rates. If anything, Chair Powell was a bit more dovish than investors expected.

 

He surprised markets by reducing the size of the monthly taper, which will begin later this month. At present, the U.S. Central Bank is buying $120 billion a month in assets. Investors were expecting a $20 billion monthly reduction in purchases, but the Fed decided to reduce those purchases by only $15 billion a month.

 

It appears that the rate of inflation is still not serious enough for the Federal Reserve to move forward their expectations on raising interest rates. Next summer is the earliest Powell sees a need to raise interest rates. However, he did admit that he expects the conditions that are pushing inflation higher could persist well into next year. 

 

His stance is similar to the position already taken by the European Central Bank (ECB). The ECB expects to continue its easy money policies into next year. But while most of the developed world is applying the momentary brakes ever so gradually, many emerging market countries are already raising interest rates to head off rising inflation in their economies. Chile, Russia, and Brazil, for example, have hiked interest rates recently. Of the 38 central banks followed by the Bank for International Settlements, 13 have raised a key interest rate at least once this year.

 

Investors are paying close attention to the stalled situation surrounding the two large Biden infrastructure bills after the resounding thrashing the Democrats suffered this week in various elections. Voters seem to be increasingly unhappy with what they perceive as their "do nothing." President Biden's approval ratings are dismal, and time is running out to reverse the situation before the mid-term elections.

 

It remains to be seen whether this week's election results will spur this fractured party to come together and start legislating or sink further into disarray. The House is expected to vote on at least one if not both bills on Friday, Nov. 5.

 

There is a lot riding on the outcome for the economy and the markets. And while the price tag for both bills is high, as a percentage of GDP, in reality the expenditures are a drop in the bucket when compared to what other countries are spending on their own infrastructure plans. Is it any wonder that China sees us as no more than a "paper tiger," whose politicians lack the will to compete in the areas that really matter?

 

Earnings season is winding down, but once again the results defied even the most bullish of expectations. That bodes well for stocks. More and more sectors are participating in the upturn and there doesn't seem to be many storm clouds on the horizon until we head into December, if then. This week's decline in oil may also act as a tailwind for stocks. Higher energy prices have been leading inflation higher for the last few months. If oil pulls back from here, or just remains in a trading range, equities could get a boost from that as well.

 

To me, however, the most important event of the week was drug company Pfizer's announcement that Paxlovid, a COVID-19 pill, reduced the risk of hospitalization or death by 80 percent in a clinical trial that tested the drug in adults with the disease who were also in high-risk health groups. 

 

Pfizer CEO and Chairman, Albert Bourla, said, "These data suggest that our oral antiviral candidate, if approved or authorized by regulatory authorities, has the potential to save patients' lives, reduce the severity of COVID-19 infections, and eliminate nine out of 10 hospitalizations." To me, this pill could be a game changer for the economy and for people all over the world. It is possible that we could see the coronavirus battle won by sometime next year.

 

I have been expecting a shallow pullback in the markets for the past two weeks. Instead, stocks have just climbed higher and higher. They are extended, but history says they can get even more so. As such, I am not holding my breath, nor waiting around for it. Whatever pullback does occur should be bought.