How the Stock Market Affects Food Prices
Recently, the world as we know it fell into chaos when companies folded, hundreds lost their jobs and most of the world was thrown into recession. These were all caused by a domino effect that started when stock prices plummeted. Most of us were in the dark as to how this happened. So maybe the first thing we should look at is what the stock market is and how it works, in layman’s terms.
Say you own a restaurant chain which has become quite profitable, and you want to make more of them, but you don’t have enough money to put them all up by yourself. You can have the option of going public or putting a stake in the ownership for sale to the public through stock shares. Now, the more favorable your company seems to be doing, the more people will want to own a part of it, the more capital you will have for investing in the business. This in turn will increase the price of your stocks, as demand raises a stock’s value.
One of the biggest selling stocks, however, is oil stock. When a large number of investors begin to invest in oil stock, this will cause the stock to be worth more and thus raise the price of the stock along with the price of gasoline. Once gasoline prices rise, everything else rises along with it, including food.
Some owners will want to hold on to their shares as long as they feel that the company is doing well (thus, reputation is very important), though others will want to sell their shares as soon as their value goes up and they feel they can get a profit from their initial investment. This is manageable so long as they don’t all suddenly sell all their shares, leaving you with no capital. This is actually what happened that set off the recession. When news broke about how certain companies weren’t as profitable as they made themselves out to be, their stockholders made a mad rush to sell out their stocks, draining the companies of capital so quickly that they had no time to recover and went bankrupt, leaving their employees out on the streets.
Though this of course was major bad news, the good side to it is that unemployment and stagnant wages are limiting consumers’ ability to spend, forcing companies to keep a lid on prices. According to Business Week, economists expect consumer prices ticked up 0.1 percent in February from the previous month. Gas prices dropped in February, likely canceling out an expected increase in food prices. Economists expect the weak recovery to keep inflation in check for the rest of the year. Factories are running well below normal levels of production and unemployment is at 9.7 percent. That spare capacity means companies can ramp up production without having to increase wages or other costs. Low inflation allows the Federal Reserve to keep its key short-term interest rate at its record-low level of near zero. The Fed said it would maintain that rate, which is intended to boost the economy, for “an extended period.” Most economists interpret that to mean at least six more months. Fed policymakers also said that “inflation is likely to be subdued for some time.”
And there you go, the silver lining in this huge thundercloud.