We will all tell our children of the dark days of the Great Lime Shortage of 2014, when Mexican restaurants raised their margarita prices and otherwise respectable bars committed the blasphemy of serving gin and tonics with a slice of lemon. The shortage has become the subject of news media fascination, with the latest piece on the front page of Friday’s Wall Street Journal.
What’s going on? Because of a combination of bad weather, disease and supply-restricting behavior by Mexican drug cartels, the wholesale price of a case of limes has soared to about $100 from around $15, rendering what was once a bargain fruit a luxury item. The Latin grocery store near my house has raised its price to 69 cents each from eight-for-a-dollar, which Excel tells me is a 452 percent increase.
Let’s blame Janet Yellen.
After all, the United States imports most of its limes from Mexico, and years of ultra-low interest rates and money-printing by the Federal Reserve, led by Ms. Yellen, have debased the dollar, making the cost of imported limes higher than it otherwise would be. All this cheap money has probably also fueled speculative activity in the lime markets, pushing up the cost of gimlets, mojitos, tom kha gai soup and other lime-reliant treats.
That’s nonsense, of course. Unless Ms. Yellen has some heretofore unknown tie to the Knights Templar or power over the weather, the Fed has nearly nothing to do with lime prices. Rather, it is all about the idiosyncratic supply and demand within the market for limes, in which the reduced supply of limes is met by higher prices.
But while it’s pretty clearly absurd to blame the Fed for the sharp rise in lime prices, that doesn’t stop people from falling for the same convoluted logic whenever more economically significant commodities are involved, particularly oil and major food crops like corn.
Whenever the price of those commodities spikes, you hear an outpouring of blame directed at central bankers. It happened in the summer of 2008, when gasoline and food prices were skyrocketing. It happened again in early 2011, when commentators were quick to blame the Fed’s quantitative easing policies for a commodity price bump.
Of course, the causes of those price rises were broader than the causes of the limeflation now afflicting the world: The rapid growth of China and other emerging markets created strong demand for commodities in 2008, and the Arab Spring a few years later created fears of future disruption to Middle East oil supplies.
But in both episodes, you could turn on CNBC or tune in to a congressional hearing to hear elaborate explanations of how low-interest-rate policies were creating a buildup of speculative pressure in futures markets, causing a run-up in prices not for any fundamental reason other than central bank money printing.
There was a more sophisticated and reasonable version of the same logic that made the rounds within central banks: It wasn’t that easy money was the cause of rising commodity prices, but that as higher prices were rippling out into other goods, people were led to expect higher inflation, which can be self-fulfilling. And it is of course true that if prices for the full range of goods and services people buy are rising rapidly, it is a sign that the central bank is creating too much money and should raise interest rates. But one-off rises in commodity prices, whether it’s something important to the economy like oil or more marginal like limes, aren’t the same as broad-based inflation. Rather, they are usually individual markets adjusting to changes in supply and demand.
But, according to transcripts of its policy meetings released this year, fear of the run-up in commodity prices kept the Fed from cutting interest rates in the late summer of 2008 when a financial crisis was spiraling out of control. It led the European Central Bank to undertake spectacularly ill-timed interest rate increase in both the summer of 2008 and the spring of 2011, as the central bankers fretted about commodity-driven inflation instead of the crises staring them in the face.
Next time there is a sharp rise in the price of crude oil or corn or copper or all three, we would do well to ignore the catcalls aimed at central bankers and just ask: Is this really an outbreak of broad-based inflation? Or is this just a bigger, more economically consequential version of the Lime Crisis of 2014?
Otherwise, the results for the economy will be awfully sour.