Inflation, long relegated to the sidelines of concerns for the economy, is now front and center as a top U.S. economic concern. The Bureau of Labor Statistics reported the Consumer Price Index in February increased 0.8 percent, or at an annual rate of 7.9 percent. Prices for energy and used cars were the leaders driving the increases (Figure 3). Fuel oil prices were up nearly 44 percent, gasoline 38 percent, as utilities 24 percent and used car prices surged 41 percent. Food prices were up 7.9 percent. Agriculture producers are feeling the pinch of higher prices. Prices for several inputs into production agriculture like fertilizer, fuel, parts, and feed have increased dramatically. A Nebraska rancher reported the recent purchase of a replacement belt for a tractor cost $120 when it was priced at $80 the month prior. And the latest delivery of gasoline and diesel to the ranch cost roughly twice as much as last year.
Figure 3. 12-Month Consumer Price Increases by Category
In order to confront the higher prices, the Federal Reserve last week raised its benchmark, federal-funds, interest rate 0.25 percent, the first hike since 2018, and signaled several more rate hikes for 2022. The benchmark rate could reach nearly 2 percent before the year is out. Raising rates increases the cost of borrowing, dampening spending, and deflating inflation. This means higher borrowing costs for farmers and ranchers. But inflation also mean more investors turn to farmland as an inflation hedge. Research by Dr. Bruce Sherrick, Director of the TIAA Center for Farmland Research at the University of Illinois showed that farmland returns are positively correlated with inflation. When inflation goes up, so do farmland returns, meaning farmland can be a good hedge against inflation.
The Federal Reserve projects the core inflation rate, not including energy and food, will end the year at 4.3 percent and fall further to 2.6 percent by the end of 2023. While higher costs will pinch, Nebraska producers can take heart. The Argentinian central bank recently raised its benchmark rate to 42.5 percent. Inflation in Argentina was last measured at 51 percent.