The term inflation is commonly used to describe a general increase of prices. However, back in the mid-1800s where the term started to emerge in the literature, it was not in reference to something that happens to prices, but as something that happens to a paper currency. Back in those days “bank notes,” a private paper currency redeemable for a specific amount of metal, were becoming widely used. At times, banks did not have enough gold or silver to satisfy all of their claims, therefore, they “inflated” the number of bank notes in relation to the amount of metal they had. Therefore, inflation was the fall in value of paper currency or money due to an excessive issuance of paper currency or money. From March 2020 to February of 2022 the money supply in the US increased by 41.2 percent, or 20.6 percent per year, while average GDP growth over the same period of time was 3.7 percent (FRED, 2022). As a reference point, money supply over the last decade had increased an average 8.2 percent per year.
On the other hand, rapid changes in commodity prices are very common in agriculture and usually is due to supply shifts. Good weather, improved technology and political stability are some variables that shift supply to the right causing an increase in supply and a decrease in prices (Graph 1). On the other hand, bad weather, increase in input prices and political instability or war are variables that shift supply to the left causing a decrease in supply and an increase in prices (Graph 2). The Russia and Ukraine war has caused a supply shift to the left in many commodities such as wheat, corn, fertilizer, and oil, given that these two countries are major producers. Therefore, as quantity supplied of those commodities decreased, prices increased. However, these increased prices caused producers of those commodities around the world to react and produce more and now prices are on a downward trend. Also, demand for those commodities decreased contributing to the decrease in prices. These supply shifts happen very often in agricultural commodities without causing inflation to spike. In fact, Asian economies are experiencing normal levels of inflation as seen in the chart by The Economist.
Dr. Milton Friedman, winner of the 1976 Nobel Prize in Economic Sciences, stated back in 1963 that “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” Dr. Friedman was right then and still is now.
Bryan, Michael F., 1997. “On the Origin and Evolution of the Word Inflation,” Federal Reserve Bank of Cleveland, Economic Commentary, 10.15.1997.
Federal Reserve Economic Data. https://fred.stlouisfed.org. Accessed July 23, 2022.
Ribera, Luis. “Difference Between Inflation and Changes in Commodity Prices“. Southern Ag Today 2(31.4). July 28, 2022. Permalink