Why it’s still the case that Americans should stop whining and complaining about rising food prices
AEIdeas
Last September, I wrote a post titled “Americans love to complain about rising food prices; here are three reasons they should stop whining.” In an article today in The Federalist, Sean Davis responds to my post in an article titled “American Families Are Right To Be Worried About Inflation.” Davis levels a number of criticisms at my post, and also criticizes more recent posts about inflation by Ramesh Ponnuru and Jimmy Pethokoukis. Here are some of Davis’s criticisms:
A lot has happened since Perry told us ten months ago to stop whining. Did events prove him right or wrong? Was his inexplicably bizarre method of averaging four years’ worth of inflation data actually an effective way of predicting future price growth? Let’s take a look.
My “inexplicably bizarre method of averaging four years’ worth of inflation data” was actually explained in my post: Given the somewhat volatile history of food prices on a monthly basis, we can look at the average food inflation rate over a longer period of time to smooth out some of the volatility. I showed a chart of the 48-month moving average of monthly food inflation rates to provide a smoothed measure of food inflation back to the 1960s.
Here’s a different way to look at historical food inflation using an alternative method of smoothing out the extreme volatility in monthly food prices. The chart below shows food inflation on an annual basis, using the average values of monthly “CPI: Food” in each year from 1990 to 2013, and the June value of “CPI: Food” for 2014.
Over the last 25 years, annual food inflation has averaged 2.68%, and has been as high as 5.8% in 1990 and 5.5% in 2008. Over the last year, food inflation has been only 2.23%, or almost 0.50% below the 25-year average. So again, I say to Americans — “stop your whining” about food prices and food inflation, it’s really not that bad. It could be worse, and it was worse – in 7 out of the previous 10 years, inflation was higher than it is right now this year!
I’d also point out that I certainly wasn’t using past food inflation to predict future food inflation, I was merely pointing out that actual, historical food inflation as of last summer certainly wasn’t very high at all, by historical standards:
Food prices over the most recent 12 month period through July [2013] have risen by only 1.44%, following 12-month increases of 1.38% in June, and 1.37% in May. Over the last 12 months starting last August, the annual food inflation rate has ranged between 1.37% and 2%, and averaged 1.6%.
With those relatively moderate rates of food inflation a year ago, I think I was quite justified telling consumers to stop their whining. What food inflation? There was none!
Well, what’s happened since last September? According to Davis:
It turns out food prices have soared since Perry so confidently told us to shut up about them. The chart below shows the rapid disparity between food price growth and wage growth since Perry issued his “stop whining” directive. No joke: compared to less than a year ago, egg prices are up 13%. Beef is up 10%. Pork is up more than 9%. Fresh fruits are up over 7%. Overall, the prices of food at home are up 2.3%, while average hourly wages are up only 1.4%. In other words, food prices are growing 64% faster than wages.
Now it’s Davis who is using an “inexplicably bizarre method” of picking six food categories to supposedly demonstrate that “food prices have soared” from September 2013 to May 2014 (June data only became available today). Here’s the problem with that “inexplicably bizarre method” — the overall CPI for All Food Items increased by only 2% from September 2013 to May 2014 (with beverages it was only 1.9%, and for food at home by 2.3% as Davis reported)! Therefore, Davis’s chart makes food inflation look artificially high by picking six food categories that all increased multiple times the 2% increase in the CPI: Food (and 2.3% for food at home).
There’s another issue with the Davis analysis – average hourly wages according to this measure increased from $20.21 in September 2013 to $20.58 in May 2014, which is a 1.6% increase. And that leads to another problem — the overall CPI increased by 1.4% between September last year and May this year, which was less than this 1.6% increase in average hourly earnings (and the same as the 1.4% wage increase used by Davis). In other words, average nominal wages by one measure increased slightly greater during that period than did overall consumer prices, meaning that real wages increased. For the measure Davis uses, real wages were flat, but not declining.
The chart above displays a more realistic representation of changes from September 2013 to June 2014, and shows that both measures of hourly wages (available here and here showing increases of 1.83% and1.62%) have: a) increased by less than three measures of food inflation (1.95%, 2.1% and 2.2%), but b) by more than the increase in the CPI-All Items (1.4%), meaning that real wages have increased over that nine-month period.
Davis then compares increases in his selective sample of six food groups to the increase in average hourly earnings over a longer period going back to June 2009 (see chart above), and concludes that “food inflation (of my six bizarrely selected food groups) blows away wage growth.” But we’ve got the same problem here as before. Average food prices increased only 11.26% between June 2009 and May 2014, nowhere near the increases of 20% to 35% in the six-item food sample. Also, average hourly earnings increased by 10.61% over that period, slightly higher than the overall increase in consumer prices of 10.38%, which means real earnings increased slightly since June 2009.
Here’s another problem for Davis’s food price analysis. The measures he uses are food price indexes constructed by the BLS, and not actual retail food prices. For whatever reason (maybe because of attempts to adjust for quality?), the BLS price indexes Davis uses for food items like eggs don’t match actual retail price that consumers actually pay at grocery stores, as also reported by the BLS here.
For example, Davis reports correctly that the BLS index measure for eggs increased by 13% between September 2013 and May 2014. But according to actual retail price data from the BLS, a dozen eggs increased in price by only 5.2% during that period, from $1.897 per dozen to $1.996, which is less than half of the increase reported by Davis using the egg index series. Now that June retail price data are available, egg prices fell last month, and the increase in eggs since last September through June is only 2.7%, from $1.897 to $1.948 per dozen. That increase in the retail price of eggs from September 2013 to June 2014 is displayed in the table below. Also displayed in the table below are percentage increases in the retail prices of 30 different food items over the last nine months since my September post. Those 30 items represent most of the BLS items (and categories) available from its “Average Price Data” database here.
Notice that over the last nine months, the retail prices of 19 food items have decreased, while 11 have increased. The biggest food price increases since last September have been for the various cuts of beef (see a detailed list here), which have all registered double-digit percentage price increases. Pork products like ham (3.4%) and bacon (7.5%) have also increased, as have milk (5.8%), eggs (2.7%) and cheese (2.3%).
On the other hand, other meats have declined in price since last September — turkey by almost 12% from $1.819 to $1.606 per pound, and chicken breasts by 2.9%, from $3.608 to $3.504 per pound. From the table, we can see that the retail prices of many other food items have fallen, many pretty considerably, since last September such as strawberries (-13.8%), coffee (-8.3%), potatoes (-8.2%), cookies (-8.2%), bologna (-7.5%), peanut butter (-7.3%), etc. Importantly, many of the food items that showed significant price declines (chicken, turkey, coffee, potatoes, sugar, etc.) weren’t included in the food items used by Davis.
Bottom Line: Also over the September 2013 to June 2014 period, average hourly wages increased by 1.83% (from $20.21 to $20.58), which was slightly higher than the 1.69% overall increases in all consumer prices during that period (including food). The CPI for Food increased 2.06%, although only by 1.95% when beverages are included. But it’s not food prices alone that determine our cost of living, it’s the cost of all consumer goods and services, as measured by the CPI-All Items. And by that measure of all consumers prices, average hourly earnings have been increasing greater than overall consumer prices, meaning that real wages have increased slightly.
To conclude by paraphrasing Davis, the prices of things people buy have really not been growing faster than most average workers’ ability to buy them. For example, over the most recent 12-month period, the increase in average hourly earnings (2.3%) has outpaced the increase in the CPI (1.9%), meaning that real wages have gone up. It’s time for pundits to stop pretending that rapidly rising prices are such a big deal, because they’re really not. And it’s still the case that Americans should stop whining about rising food prices, because they’re not. Especially if you’re eating strawberries, turkey, chicken, coffee, grapefruit, ice cream and peanut butter these days.
| Food Item | Change in Retail Price, Sept. 2013 to June 2014 |
|---|---|
| Strawberries | -13.8% |
| Turkey | -11.7% |
| Coffee | -8.3% |
| Potatoes | -8.2% |
| Cookies, Chocolate Chip | -7.6% |
| Bologna | -7.5% |
| Peanut Butter | -7.3% |
| Grapefruit | -4.7% |
| Potato Chips | -3.9% |
| Sugar | -3.6% |
| Chicken Breast | -2.9% |
| Oranges | -2.6% |
| Spaghetti | -2.5% |
| Ice Cream | -2.2% |
| Broccoli | -1.6% |
| Bread, White | -1.3% |
| Margarine | -1.0% |
| Apples | -0.9% |
| Orange Juice | -0.3% |
| Rice | 0.1% |
| Bananas | 1.0% |
| Flour | 1.9% |
| Cheese | 2.3% |
| Eggs | 2.7% |
| Ham | 3.4% |
| Milk | 5.8% |
| Tomatoes | 7.0% |
| Bacon | 7.5% |
| Ground Beef | 10.8% |
| Lettuce | 14.4% |
| CPI – All Items | 1.7% |
| CPI – Food | 2.1% |
| Average Hourly Wages | 1.8% |
These types of lists are good if it updated frequently.
It tells us what to eat more of, and what to hold off on for a bit.
In other words, if someone wanted to be really strict about avoiding food inflation, they could just check lists like this, and eat the foods that have fallen (or at least risen less than +1.0%) in the last 12 months.
A year later, different items will have had price declines, so eat those.
There will always be a selection of foods that have fallen in price, so there is no chance of one’s diet becoming too limited.
Again, this obsession with seeing inflation everywhere by supposed ‘hawks’ is crazy. Since America steers everyone into having a mortgaged house, more people should be PRO-inflation… If someone has a mortgaged house, the single biggest threat to their net worth is too-low inflation.
@Toads
> if someone wanted to be really strict about avoiding food inflation, they could just check lists like this
Why not simply comparison shop in the stores? Would that not be complicated enough?
“Again, this obsession with seeing inflation everywhere by supposed ‘hawks’ is crazy“…
Well maybe but ignoring reality and falling back on sometimes questionable data (federal data with corrections coming out a week or two later) doesnt sound like a good idea either…
Price of Beef and Bacon Reach All-Time High
Where The Real Inflation Is
By eating only the foods that had dropped in price over the past year (ignoring dietary considerations), and repeating this process for a few years, wouldn’t one eventually reach the point at which the stores would be paying me to buy their food? I can hardly wait!
What is inexplicable is the peevish fixation on inflation that defines economic policy of many right-wingers.
Prosperity is dangerous to rigid price stability. Get used to it.
A nominal index of prices is a useful device—though necessarily inexact, and especially over longer periods of time.
BTW—measured in gold, there has been huge inflation in the last three years.
The goal of macroeconomic policy should be prosperity. Rigid price stability—even if it could be measured—is of secondary importance.
@Joe B.
> The goal of macroeconomic policy should be prosperity.
Interest rates are related to inflation rates. Low interest rates are essential for prosperity.
Hit
“Interest rates are related to inflation rates. Low interest rates are essential for prosperity.”
Yes, if low interest rates reflect a high propensity to save. If they are artificially held low by a central bank, breaking the natural price signal, they will result in over investment, inflation, and misallocation of funds (bubbles).
Absolutely correct, Ron. That is a huge factor in the housing bubble.
Interest rates are the price of money. Just as price fixing leads to problems, so does interest rate fixing. Like prices, interest rates need to adjust to take into account the supply (savings) and the demand (loans) differences.
Low inflation now means there is a lot of quantitative eased monopoly money to play with…
Yes. The focus on ‘real’ GDP, rather than nominal, has been catastrophic, and is why each recovery is weaker than the last.
Corporations make decisions on hiring and capex based on nominal metrics like revenue and profits.
‘Real’ GDP is for academics, and matters when measured over a long period like a decade. The notion that ‘real’ GDP matters for a single quarter, is merely due to the ivory-tower mentality of academics who have no concept of real business.
Compound that with the disconnect that the US economy is built around getting people to buy houses on heavy leverage. Yet, at the same time, there is an irrational opposition to the slightly higher inflation that would make mortgaging a house far less stressful.
An America of 3% inflation (hardly high) would be happier than an America of 1% inflation, due to home equity piling up faster, more corporate risk-taking, etc.
High inflation would be 5% or more. 3% is not high.
Corporations make decisions on hiring and capex based on nominal metrics like revenue and profits.
To some extent, that is true. But firms are also acutely aware of inflation. Firms are always looking for ways to beat the price cycle, whether it be locking in commodity prices or a period of time or building in a price escalator into their contracts. They also need to be aware of inflation because it will affect employee compensation.
Firms may not track “real” profits or revenue, but you can bet your bottom dollar they are well-aware of it.
@Toads
> the US economy is built around getting people to buy houses on heavy leverage.
No. Artificially-high home-ownership is an irrational goal tacked onto the economy. The economy isn’t based on it, and would instantly and forever-after be better off without it.
Well, yes.
What I meant was that since so many people have been herded into being in mortgages, the simultaneous opposition to even 3% inflation (hardly terrifying) is illogical on the part of policymakers.
3% inflation is better than 1% inflation, particularly when so many people still have negative equity.
So you want high inflation to bail out people who are upside down in their home mortgages? Didn’t the government just bail out the banks for the housing bubble with taxpayer money (should have bailed out the borrowers if Government is giving away Trillions of dollars but bankers run the Gov’t, not the people). I want zero inflation so no one can profit from it. Used to be that banks had to borrow money by paying interest to savers in order to loan it to other borrowers. Bankers knew not to loan money without people having jobs and putting at least 20 percent or more down. All changed when Government started messing with the mortgage market (FNMA, FMAC, etc.) and Fed making cheap (non-market based interest rate) money. People didn’t get upside down in their mortgages. All this mess is government & banker created. There was even a time a hundred years ago that people paid cash for their houses.
You do need to average the CPI for food for exactly the reason you said: it is volatile. Without that some way to smooth the trend, there is so much noise as to make the data hard to read.
All that said, I’m not sure food is the thing to worry about. As you’ve said before (and shown multiple times), the share of spending on food has fallen so much. Rising food prices will not bankrupt the American consumer. It may be one straw that breaks the camel’s back, but in and of itself, it’s not much.
Personally I have been cutting back on steak because of recent price increases. The food increases do affect us personally.
Also consider that food is a non fixed cost. I have to pay the rent and water bill and what is left over goes to food and entertainment and such. With only 1/3 my salary discressionary increases seem magnified. I can’t stop paying rent – and getting out of a lease and finding a cheaper place takes awhile – so the first thing to get cut is food and entertainment.
In actually keep track of my spending pretty well and know that payments to grocery stores is my second biggest expense next to housing – and they are compatible in scope.
> I have to pay the rent and water bill
You can use less water.
> payments to grocery stores is my second biggest expense
$2/day/person?
Don’t they use product substitution now to make food prices look lower? My understanding is if they use apples for the CPI inflation index and apples go up out of sync with say peaches – they will substitute peaches in on the assumption the consumer would likely switch anyway and therefore not have as much personal inflation. If true, I find this bogus.
The formula changed from Laspeyres to Geomeans. This implies that utility curves are assumed to be U-shaped rather than L-shaped which is probably more realistic. Not sure why you find this bogus. If apples double in price why wouldn’t you be more likely to buy peaches?
#4: Americans are fatties. When they’re malnourished and skinny then they can start copmlaining about food prices.
this seems like an argument based on an assumptive premise.
CPI is no less “inexplicably odd” when looking at food prices. it may use more items, but they also get swapped out and rearranged to reduce inflation.
your criticism seems to start from the premise that CPI is a good measure of food prices.
but it’s not.
it is deliberately designed to measure the price changes of a basket of goods whose overall value declines. that is the way geometric weighting works.
it overweights items whose relative price drops compared to substitutes, but ignore the fact that this is a trade down to a less desired (and valued) food.
if we would rather eat flank steak as opposed to rib eye, then rib eye would be cheaper.
these weightings also presume all price changes come from the supply and not the demand side, and, therefore, often have the wrong sign.
these factors combine to ensure that CPI food will understate inflation.
it misweights a basket of declining value with a one sided bias.