Customer Support is a weekly commentary segment by John Phipps on U.S. Farm Report.
The following question is by viewer Don Wirth Tangent, Oregon: “So, does the increase in value of capital assets keep up with inflation in the end?”
My answer is a sort of. This is comparing apples with screwdrivers, essentially. What we generally call inflation is consumption expenditures – food, clothing, rent, car expenses, medical care, etc. Here is the fabled basket of goods and services monitored to calculate that most popular headline number – the consumer price index. Notice what is not in the basket, stull like stocks, bonds, and real estate.
Capital assets like machinery are investments, not consumables. They have been zooming upwards due to several factors like chip shortages, labor disputes, supply problems, farmer income and above all, profit opportunity. Assets cost more because sellers can get more.
Inflation comes in only when we sell capital assets, turning them into dollars. Would those dollars received buy the same goods and services as earlier?
Here are the separate price indices for the last 5 years as of October:
CPI rose 14% since 2016. In case you’re wondering how the recent headlines of “6 percent in October” fits in, that’s an annualized rate for that month – what twelve Octobers in a row would add up to.
The farm machinery PPI is like a CPI for equipment. It rose 22% over the same period. Then there is machinery Pete’s used equipment price chart, which calculates a stunning 43% rise in used equipment.
Remember the CPI measures prices of consumables which disappear after being purchased - like a box of Twinkies, for example. Assets are not consumed but have value after the purchase, often higher. The CPI rose fairly steadily for the last 5 years, but the machinery PPI had two jumps in 2018 and now, with flat prices in between. Obviously, we should all have bought stuff in 2019.
The other big capital asset for farms is, of course, land. There are several indices compiled by various university and real estate sources. I picked Illinois land values from farmdoc. Those prices have risen 8% over the last 5 years, but the recent boom since October 1 will add some to that.
So, did asset values keep up with inflation? Yes, but it doesn’t really mean much unless you sell them.
