By Michael Langemeier
Recent articles have examined the increases in energy and fertilizer prices since early March (Arita et al., 2026; Paulson et al., 2026). This article takes a step back by examining longer term trends in general rates and agricultural input prices. In addition to demand and supply shocks, input prices for agricultural producers are affected by changes in general inflation. During the 1973 to 2025 period the average annual increase for the implicit price deflator for personal consumption expenditures and the USDA agricultural price index for production items were 3.4% and 4.1%, respectively. The correlation between the annual rates for these two indices was 0.59 over this period.
Long-Term Relationships
Before discussing long-term relationships between general inflation and farm input prices, it is important to define key terms. Inflation represents the decline in purchasing power of a currency over time (Investopedia, 2022). Quantitative estimates of the rate of inflation are typically made by examining the increase or decrease in the price levels of a basket of selected goods. Inflation measures include the consumer price index and implicit price deflators. Though computed using different methodologies, inflation measures are highly correlated over time. Most economists would agree that an increase in the supply of money is the root cause of inflation. Inflation mechanisms can be classified into three types: demand-pull inflation, cost-push inflation, and built-in inflation (Investopedia, 2022). When an increase in the money supply increases overall demand more than the productive capacity of an economy, we have demand-pull inflation. When production costs increase prices, we have cost-push inflation. Quality improvements and technological change are often incorporated into cost-push inflation. Quality improvements would increase prices while technological change tends to reduce prices. Finally, when individuals expect current inflation rates to continue in the future, we have built-in inflation. In general, the longer above average inflation rates persist, the more important built-in inflation becomes. All three of these types of inflation mechanisms have contributed to the inflation we have witnessed in the last couple of years.
Input price changes in agriculture and other industries are due to general inflation and its mechanisms as well as supply and demand fundamentals specific to a particular input. Having said that, some inputs are more closed aligned or correlated with general inflation than other inputs.
Using information for the 1973 to 2025 period from the Federal Reserve Bank of St. Louis on inflation rates and farm input price indices from USDA-NASS, we examined the correlation between the implicit price deflator for personal consumption expenditures and agricultural production items (i.e., aggregate input price index for production agriculture), feed, seed, fertilizer, fuels, labor, and machinery. The correlation coefficient between the implicit price deflator and agricultural production items was 0.59. The average annual rate of change for agricultural input prices over the period was higher (4.1 percent) than the rate of change for the implicit price deflator (3.4 percent). The average annual price changes for labor (4.5 percent) and machinery (5.5 percent) were significantly higher than the average increase in the implicit price deflator. In terms of the six specific input categories examined, the only correlation between the implicit price deflator and a specific input price change that was not significantly different from zero was the correlation between the implicit price deflator and feed prices. The correlations between the implicit price deflator, and labor and machinery were relatively higher than the correlation between the implicit price deflator and general farm price index (i.e., agricultural production items). This is an important result because it suggests that input prices for labor and machinery more closely follow trends in general inflation than input prices for items such as feed, seed, fertilizer, and fuels.
Source : illinois.edu