The Effect of Inflation on the Price of Milk

The Cost of Milk in 2013 vs 2008

The cost of a gallon of milk in 2013 was $3.5 while in 2008 the same quantity went for $3.68 (Statista).

Inflation-adjusted Prices

Upon correcting the price in 2008 for inflation, the output shows that the cost in 2008 (approximately $4.0) was higher than that of 2013 ($3.5). Notably, there is a small difference between the prices ($0.5).

Factors Affecting Milk Prices

The price deviation can be attributed to macroeconomic factors affecting the dairy industry. For instance, legislation on products, decline in production costs, and the increase in purchasing power of a dollar.

Nominal Price vs Adjusted Price

Also, $3.5 is the nominal price of a gallon of milk while $4.0 is adjusted for inflation by bundling milk with other goods. Thus, the difference can be caused by significant price movements in other products in the bundle. Government regulations on the production of milk can also create the $0.5 difference.

Regulations and Industry Adaptation

The lower price in 2013 can indicate that regulations might be less strict as compared to 2008 or the dairy industry had adapted to the prevailing regulations. Although the current analysis considers the $0.5 deviation for study, it is difficult to adequately expound on the differences due to the smallness of the change.

Impact of Milk Production on Prices

Nominal prices and relative prices are comparable when investigating inflation; however, a $0.5 change cannot sufficiently provide information on the nature of the dairy industry. Further, milk production was low in 2008, and thus, demand was higher leading to higher prices. In 2013, milk production was sufficient, and competition in the market led to a lower price.

References

Statista. 2018. 25 March 2018. .