How Have Commodity Prices Changed in the Money Printing Era?

How have the prices of staple products like the Big Mac, bread, milk, iron, and gasoline changed in the United States over recent decades, and what role does money printing play in this dynamic? This article aims to explore these questions through the lens of graphical representations, highlighting how an unsecured monetary system contributes to both steady and abrupt price hikes.

In recent months, social media posts have drawn attention to significant price hikes in McDonald’s Big Mac combos, with some reports indicating increases exceeding $18. Such price surges are not only impacting consumer wallets but are also dampening sales figures.

McDonald’s saw a modest 3.4 percent rise in sales during the last quarter, a figure below the 4.7 percent forecasted by Wall Street. CEO Chris Kempczinski acknowledged the company’s challenges amidst rising prices, noting the growing struggle for consumers to dine out affordably. “I think one of the main themes in 2024 will be affordability,” he remarked, admitting that individuals with lower incomes are increasingly opting for cost-effective home-cooked meals over visits to McDonald’s.

An Increase in the Amount of Money in the Economy Leads to an Increase in Prices

Since 2020, the western world has been hit by a wave of inflation, which has raised prices cumulatively by more than 20 percent in the USA, among other regions. Although many different factors in economic activity affect the prices of products, monetary inflation, or money printing, has played a major role here. Let’s see how the prices of Bic Mac and other products have changed compared to the money supply in the US (M2).

M2 includes cash in circulation, bank deposits with the central bank, demand deposits, units of money market funds, time deposits and traveler’s checks

Essentially, it shows the amount of money in the economy as a fiat currency. The comparison dates back to 1986, when The Economist started compiling the Big Mac Index.

In the USA, the price of a Big Mac has risen by 3.6 times in 38 years. During the same period, the money supply has increased by 7.9 times. However, the price of burgers hasn’t kept up with the same pace as the money supply.

This could be due to two main reasons: firstly, improvements in productivity, and secondly, shifts in the economy’s structure. More money has flowed into newer sectors like technology and the Internet. Nonetheless, a significant portion of the price hike can be attributed to the growth of the money supply. This trend holds true for various other products we discuss in this article.

The graph below illustrates the relationship between the amount of money and the price of petrol in the USA. A notable correlation is evident. ‘Gasoline’ prices in the US reached their highest point in 2022, with an average cost of $4.9 per gallon ($1.29 per litre). Even at this peak, fuel prices in the USA remained considerably lower than some other countries in Eastern Europe, such as Estonia.

The graph below compares the price of bread with the money supply. The price of a pound (453 grams) of white bread has risen 3.6 times since 1986, similar to the price of a Big Mac.

We also examine the price of milk, a commodity the Federal Reserve has been tracking since 1995. Unlike some other goods, the increase in milk prices has been relatively modest. Overall, it’s apparent that dairy product prices have risen much more gradually compared to many other items tracked in the consumer price index.

Iron ore stands as one of the vital inputs to the economy. Its price has surged significantly in recent decades. In 1990, a ton of iron ore cost merely $14. Today, that price has soared nearly tenfold to $136 per ton.

The graph below serves as a symbolic representation, depicting the consumer price index since 1800. It clearly illustrates how consumer prices began to escalate during wartime periods when the gold standard was either partially or completely abandoned by the banking system, leading to the printing of money to fund the war efforts. Additionally, it highlights the steady rise in consumer prices following the abandonment of the gold standard against bank reserves such as The Federal Reserve Bank.

The acceleration in the consumer price index became more pronounced in the 1960s during the Vietnam War, as the US government ramped up social spending. This strained the gold standard, as the amount of currency created exceeded the available gold reserves. Eventually, the gold standard was entirely abandoned in 1971, marking a shift to the current system where currencies are not backed by any tangible asset.

It’s evident that the Consumer Price Index (CPI) has exhibited a steady increase since the abandonment of the gold standard. This can be primarily attributed to the rapid expansion of the money supply that ensued. With the elimination of the gold standard, both the central bank and the government lost a restraint on controlling the circulation of money within the economy.

Comparing the price of gold to the Consumer Price Index (represented by the red line), we observe that this ratio has essentially remained within a specific range for several centuries. To enhance comparison with the CPI, the ratio has been multiplied by 20 in the graph.

To learn more about this topic read here: The Consumer Price Index (CPI) and Gold Price

We observe that consumer prices for gold peaked in 1970, which aligns logically with the circumstance at that time. By then, the USA had already engaged in significant money printing efforts while attempting to maintain the gold standard, which fixed the price of gold. However, following the abolition of the gold standard, allowing for the liberation of the price of gold, its value surged at a much faster rate than consumer prices. This indicated that gold increased its purchasing power.

In recent decades, gold has essentially moved sideways in relation to consumer prices

To a large extent, gold, in products such as gold coins, is now considerably more expensive compared to consumer prices. This can be primarily attributed to numerous changes made in the calculation principles of the Consumer Price Index (CPI) over the last 40 years.

Key Takeaways

In summary, this article delves into the fluctuations in commodity prices over recent decades, particularly focusing on staple products like the Big Mac, bread, milk, iron ore, and gasoline in the United States. Through the lens of graphical representations, it explores the impact of money printing on these price dynamics, revealing both steady increases and abrupt surges.

Notably, social media posts have highlighted significant price hikes, such as those seen in McDonald’s Big Mac combos, reflecting the strain on consumer budgets and subsequent impacts on sales figures.

Despite modest sales growth, challenges persist for consumers grappling with rising prices, prompting shifts in spending behaviours

Analysing various commodities, it becomes evident that while some prices have surged dramatically, others have risen more gradually, indicating nuanced impacts of monetary policy. Additionally, historical data originally unveils the correlation between wartime periods, monetary policy shifts, and fluctuations in consumer prices, notably after the abandonment of the gold standard.

Furthermore, comparisons between gold prices and the Consumer Price Index underscore the complex interplay between monetary policies, commodity prices, and purchasing power. While gold’s value surged following the abolition of the gold standard, recent decades have seen it maintain a relatively higher price compared to consumer goods, partly due to changes in CPI calculation methodologies.

Overall, this exploration highlights the multifaceted nature of commodity price movements in the era of money printing, underscoring the intricate balance between monetary policies, economic structures, and consumer purchasing power.