.“In December, the index for eggs rose 11.1 percent.” Bureau of Labor Statistics
The Egg Problem
The CPI release for December 2022 is full of interesting information, largely obscured by the way the data is packaged (as described here in a previous column).
Sometimes, it is a detail that illuminates the big picture. One data-point leaps right out of the December CPI market basket. “Eggs” saw the highest month-over-month inflation – by far – of any expenditure category.
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This was not just a one-month spike. Serious “Egg inflation” began last Spring.
What is going on here?
The Usual Explanations
It is interesting, if also disheartening, to see how the media seem ready to invent explanations that fit the preconceived narrative. According to the current conventional wisdom, this strange little aneurysm in the price of eggs is part of inflation-in-general, the “Big Inflation” now supposedly ravaging the economy. Prices are going up all over, “inflation is out of control,” so — why not with eggs? To support this claim, the press has postulated linkages between egg prices and other inflationary trends, driving up the costs for egg producers.
- “Of course all the other factors contributing to overall inflation — including transportation costs due to fuel and labor shortages — are helping drive prices too.”
Others offer an alternative hypothesis:
- “Chicken feed (like corn and soybean meal) is getting more expensive…The situation has been exacerbated by elevated feed and energy costs for producers.”
And so, others blamed “record holiday demand” –
- “…and then there’s that high demand for eggs, which spikes this time of year. People buy more eggs around the holidays, when they’re baking and cooking more, and eating breakfast at home more often.” – CNN (Dec. 27, 2022)
Eating more breakfast… Really?
Journalists sometimes strained themselves to support the thesis that this is a manifestation of the “structural inflation” that has supposedly taken hold. And they certainly feel our pain.
- “The price increase in eggs also comes as the cost of most foods have increased significantly, putting a strain on grocery shoppers and small business owners alike.” – ABC News
The Story Doesn’t Hold Up
None of these “theories” are valid.
First of all, aside from eggs, “most foods” have not “increased significantly” in price, as the first chart above shows. The Global Food index has declined by an average of 1.5% per month since March 2022. The idea that the egg anomaly is just part of some broad wave of Big Inflation is not sustainable.
Nor can it be attributed to costs increases in production factor inputs. Chicken feed and energy cost increases have been modest and declining since the summer, and are now in a state of deflation. The correlations with egg prices are negative.
Nor is the egg problem a demand-driven phenomenon. Per capita consumption of eggs varies only 1-2% per year, and has declined slightly in the past five years. Americans ate about five fewer eggs per capita per year in 2022 compared to the pre-pandemic high in 2019. Demand does go up with the holidays – but a holiday season comes round every year without spiking prices.
The Truth Is Simple: It’s a Virus
The egg industry has been devastated by the worst outbreak of avian flu in history. Tens of millions of egg-laying hens have had to be destroyed. (Our Forbes has it quite right.) The epidemic began a year ago, in January 2022, Belatedly, most accounts are now pivoting to recognize this new (and true) explanation.
Why It Matters
This may all seem much ado about not much. Even after the current price spike, the household egg budget is up only about 15 cents a day per person. Hardly worth commenting?
But, as noted, sometimes a striking detail can shine light on the bigger picture. The egg problem illustrates several important points related to the monetary policy thinking at the Federal Reserve, and to the public’s understanding of inflation in general.
To unpack the lessons of this egg thing, hopefully to be studied by economists and pundits everywhere… here are the main conclusions.
1. It’s about Supply
The egg price surge is a supply-driven phenomenon, pure and simple. The supply of egg-laying hens was cut by about 15% — quite enough to put a hard squeeze on prices. The same is true for the price trends for almost all the major categories of goods in the CPI market basket over the past three years. The supply shortages and bottlenecks have various causes, but they are broadly similar in terms of their effects.
2. It is not due to price problems elsewhere
The egg price surge was not caused by, or linked to, a supposed general price pressure in the economy. The egg problem had nothing to do with “Big Inflation.”
- “‘It’s a supply disruption, “act of God” type stuff,’ [said a global trade strategist at Eggs Unlimited]… ‘unprecedented…. kind of happenstance that inflation is going on [more broadly] during the same period.’” – CNBC
Supply bottlenecks cause price problems, but they are not caused by price problems. When General Motors couldn’t buy a 40-cent windshield wiper controller chip, and couldn’t ship thousands of vehicles, it was because the parts weren’t available and not because of semiconductor price increases.
- “GM Can’t Repair Recalled Vehicles’ Wipers Because Of Parts Shortages. Windshield wipers on more than 600,000 GM crossovers don’t work, and they can’t be fixed either.”
3. It is Transitory
Egg price inflation is transitory – yes, transitory. The overall inflationary surge across all expenditure categories is also transitory. We are in fact seeing a deflationary trend for most goods since last summer. (See the previous column on this point, here.)
4. It is self-correcting.
The egg price trend has already reversed itself. In fact, egg prices are falling rapidly. The national price for loose eggs has dropped by more than half the last month. The latest CPI reading – not even a week old (as I write this) is already stale.
This is how markets work. In response to supply problems, producers strive to add capacity and capitalize on unmet demand. Production catches up, inventories improve, prices come down, and equilibrium is restored. Supply-driven inflation is always transitory. In the next CPI reading (for January), it seems certain that the egg component will contribute to the developing deflationary trend.
Indeed, we can predict with some confidence what comes next: an egg glut, and a price collapse. It can be predicted because it has happened before. The previous “worst ever” outbreak of avian flu in 2015 was followed by a painful (for producers) oversupply crisis two years later, as the Wall Street Journal headlined “Cheap Eggs Flood U.S Grocery Stores.”
- “Egg prices are near a decade low [in 2017], spurring losses for industry giants and farmers alike.”
5. The CPI is Distorted by Such Extreme Outliers
The CPI is skewed by anomalies like the 11% one-month price increase for eggs. This is why the Federal Reserve has developed a number of alternative measures of inflation, which eliminate these bizarre outliers. The Dallas Fed offers a “Trimmed Mean” version of the Personal Consumption Expenditures Index, which eliminates the extreme price gainers and price decliners from the general calculation. The Cleveland Fed has two alternative versions of the CPI: a Median CPI (which takes the mean of the entire basket) and a 16% Trimmed Mean CPI (which cuts off the highest and the lowest 16% of the distribution). These measures may not be perfect, but they at least try to eliminate the flukes from the calculation.
The Federal Reserve’s Chicken-And-Egg Problem
There is a bigger lesson in all this. A temporary, transitory, self-correcting 50 cent “surcharge” on that 3-egg omelette might seem to be a minor matter. But it encapsulates the problem facing the Federal Reserve as it struggles to seem effectual, or even relevant, in the battle against today’s inflationary chimera. The root cause of today’s rising (and now falling) price trends, for eggs and for most other physical goods, is not to be found in the growth of the money supply (M2 has been falling for the past year), nor in overheated consumer demand (it never materialized), nor excessive fiscal stimulus (the stimulus dollars went to savings rather than consumption, hence failed to “stimulate” in real terms).
The unexciting cause of the egg price increase is merely… a shortage of eggs. The shortage is caused by a bird virus that killed lots of poor chickens. And there is nothing that the Federal Reserve can do about that.
This egg problem exposes the impotence of the Central Bank in the face of this post-pandemic “inflation.” The avian flu is a spooky parallel to the Covid pandemic, which should illuminate our understanding of the causes and consequences of the recent price trends across the economy. Determined almost entirely by supply dislocations, which are in turn caused by pestilence and war – or as economists like to call them, “exogenous shocks” – the price trends we see over the past two years – first up and now down – arise from disruptions and corrections in the real economy that are wholly unresponsive to the monetary policy remedies in the Fed’s toolkit.
The inventory of spurious explanations for our Big Inflation includes one additional “theory” — which evokes the deeper chicken-and-egg problem confronting the Federal Reserve. Some economists adhere to the strange idea that, in a sense, inflation causes itself, through the hazy mechanism of the public psychology. Actual inflation causes public expectations about future inflation to rise, which leads to changes in consumer behavior patterns that lead to… more actual inflation.
The Fed’s bigger chicken-and-egg puzzle is this: Does actual inflation cause inflationary expectations? Or do those expectations cause inflation? Right now, it appears that the Federal Reserve – unable to do anything to affect supply factors – is working the expectations theory hard, with much tough talk aimed at convincing us that they really – really! – take inflation seriously. (If you can’t be effective, you can at least be serious.) Whether this performative policy makes any sense is an open question. But deconstructing the expectations theory must be the subject of another column.
By the way — the generally accepted answer to the question of which came first, the chicken or the egg, is: the egg. Look it up.