The Economic Signal Sent by Cheap Guacamole

(Originally published here.)

Bloomberg News reports that Chipotle, the chain of Mexican-style fast-food restaurants, isn’t going to raise the price of its guacamole this year even though prices of avocados have increased. The company said that it made little sense to risk alienating customers over a temporary surge in ingredient costs. The article goes on to suggest that some at the Federal Reserve might interpret this as a sign of the economy’s continued weakness, as well as a possible harbinger of deflation.

Those concerns would be misguided. Chipotle’s resistance to passing on the cost of its avocados demonstrates one of the great strengths of advanced economies — consumers in the rich world are much less exposed to volatile commodity prices than those in poorer countries. This is particularly important when it comes to food.

The basic reason is that more advanced technologies and higher levels of worker productivity in rich countries reduce reliance on physical inputs. As a result, people in rich countries spend a smaller share of their incomes on commodity-intensive products and experience less variability in those goods.

In the summer of 2010, wildfires and heat waves in Russia, Ukraine and Kazakhstan caused the price of wheat to soar by more than 50 percent in just a month. By January 2011, the price of raw wheat had almost doubled from its level at the end of June. Governments in Tunisia and Egypt fell shortly thereafter. One reason was popular discontent over the high cost of food. By contrast, bread prices in the U.S. barely budged.

There are plenty of reasons for policy makers to fret about the strength of the economy and the slow pace of the recovery. They shouldn’t be worried by Chipotle’s plan to spare us from paying more for guacamole.

(Matthew C. Klein is a writer for Bloomberg View. Follow him on Twitter.)

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About Matthew C. Klein

I write about the economy and financial markets for Bloomberg View. Before that I wrote for The Economist on a fellowship provided by the Marjorie Deane Financial Journalism Foundation. I have worked at the world's largest hedge fund and read every FOMC transcript since May, 1987.
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