Amid confusion about why US domestic beef demand remains solid amid inflationary pressures on household budgets, Kansas City Federal Reserve Economists Johannes Matschke and Alice von Ende-Becker may have some insights.
In a recent Federal Reserve Economic Bulletin, Matschke and von Ende-Becker said, compared with most historical inflationary episodes since the 1960s, the current US inflation cycle features higher core inflation and a more resilient real economy.
That co-movement of prices and real activity suggests monetary policy has not sufficiently reduced demand, the economists said.
The publication examined the current policy stance and argue that interest rates may be less restrictive than commonly thought, they said. To lower inflation to 2%, the Federal Open Market Committee may have to maintain a restrictive policy stance for some time.
RAISING THE RATES
To help combat inflation, the Federal Open Market Committee has raised the federal funds rate by 550 basis points over the past two years, the Bulletin said. Although core CPI inflation has since declined from 6.4% in February 2022 to 3.8% in March 2024, inflation has yet to decline to 2%.
Moreover, real GDP increased by 3.4% in the fourth quarter last year, the economists said. Continued above-target inflation readings and a resilient real economy suggest demand in the US economy remains elevated.
Those elevated price pressures and the strength of the US economy are remarkable by historical standards, they said. Historically, core CPI inflation has tended to rise rapidly at the start of an inflation cycle before slowly declining to previous levels after three years.
During the current US inflation cycle starting in the second quarter of 2021, inflation initially increased 1.8 percentage points above the historical average but declined at a similar rate as the core CPI inflation, they said. Consequently, inflation is 2.3 percentage points higher than the historical average for this point in an inflationary cycle.
REAL GDP GROWTH
Historically, real GDP has grown considerably in the first year of an inflation cycle before slowing during the second year and then picking up again, the Bulletin said. The current path for real GDP exhibits a similar pattern, though growth during the first year was stronger than average.
Since the start of the inflation cycle, real GDP has grown by close to 8.0% compared with just a historical average of 6.9%, the economists said. The continued momentum in the U.S. economy and above-target inflation suggests demand remains elevated relative to supply despite improvements in supply chains and the labor supply.
Whether monetary policy leads to a restrictive interest rate environment also depends on nominal interest rates, inflation expectations and the natural rate of interest, consistent with 2% inflation and steady output growth.
CATTLE, BEEF RECAP
The USDA reported formula and contract base prices for live FOB steers and heifers this week ranged from $184.69 per cwt to $188.84, compared with last week’s range of $182.00 to $186.75 per cwt. FOB dressed steers, and heifers went for $286.69 per cwt to $292.18, compared with $286.41 to $290.67.
The USDA choice cutout Thursday was down $1.28 per cwt at $295.39 while select was down $2.49 at $285.76. The choice/select spread widened to $9.63 from $8.42 with 156 loads of fabricated product and 17 loads of trimmings and grinds sold into the spot market.
The weighted average USDA listed wholesale price for fresh 90% lean beef was $348.01 per cwt, and 50% beef was $80.18.
The USDA said basis bids for corn from feeders in the Southern Plains were unchanged at $1.36 to $1.44 a bushel over the Jul corn contract, which settled at $4.56 1/2 a bushel, down $0.02.
The CME Feeder Cattle Index for the seven days ended Wednesday was $240.38 per cwt, up $0.93. This compares with Thursday’s May contract settlement of $238.65, down $1.55.