Pepsi Thinks Inflation is Bubbling Up

Hugh Johnston is the chief financial officer of PepsiCo. According to an interview published in this morning's Financial Times, Mr. Johnston is not happy with the way the Fed focuses on the so-called "core" inflation rate.

Mr. Johnston believes that the government's way of reporting inflation understates the impact that rising food prices are having on consumers.

Quoting Mr. Johnston: "The reality right now is that food and fuel are quite inflationary", particularly on families earning less than $70,000 a year. While the core inflation rate is being quoted at 1.2%, food prices have climbed 2.7% over the past year, and gasoline prices prices have increased +28%.

The calculation of inflation is always controversial, but it seems to be getting more press than normal these days. The bond market doesn't seem to be worried - the 10-year Treasury is yielding around 3.4%, or about 40 basis points less than a year ago - but that hasn't stopped any number of analysts from commenting that inflation is just around the corner.

Yesterday's New York Times carried a short piece that talked about the problems of reporting inflation especially when it comes to food and energy.

At the top of the list for year-over-year changes in food and energy costs (according to the Bureau of Labor Statistics):

Gasoline +28%
Lettuce +27%
Bacon +16%

But look at the bottom of the list:

All fresh fruit -2%
Wine unchg.
Eggs +1%
Poultry +2%

Inflation rates, like so much data, can be subjective in the way they are reported.

As previous posts on Random Glenings have indicated, food and fuel prices are notoriously volatile, which is why they are excluded from core inflation calculations. In 2008, for example, oil prices peaked in the spring, but then proceeded to fall by more than -53% for the next 12 months.