Thursday, September 17, 2009
(click to enlarge)
Yesterday the Consumer Price Index (CPI) for August 2009 was released. Earlier, the Producer Price Index (PPI) was released.
An index compares present prices with a base period. In the case of CPI and PPI the base period is 1984 – 1984 and that period equals 100. All of the indexes began at 100.
As can be seen from the above graphs, which covers cheese and farm class II milk price, the spread between farm, processor and retailer has grown since January 2008.
The fact that the retail, CPI, has grown so large is an indication of market power.
Notice too, the processor PPI rose in August 2009 after the Secretary of Agriculture increased the “Dairy Product Support” price, effective August 1, 2009, whereas the farm PPI did not rise in August.
Taken together the graphs indicate market failure because there is not an efficient transmission of price signals through all stages.