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Why food inflation is exaggerated

The Exchange

The price of food is going up! Starvation is imminent! Impeach whoever is responsible!

As often happens, the price of food has risen during the last few months, partly because of a western drought that has driven up the cost of some agricultural products. Overall inflation was a tame 0.1% from January to February this year, but the government's food-price index rose by 0.4%. More expensive food is obviously a hardship for many families, especially those pinching pennies.

But it’s also a trigger for alarmist headlines that make it sound like parents will no longer be able to feed their kids. The Wall Street Journal recently declared there will be a “surge” in food prices in 2014, which you might think will lead to $10-a-gallon milk or $8-a-pound hamburger. Well, not quite. This surge will be an overall price increase of 2.5% to 3.5% for food products, according to the Journal, which is punishing because it could be two to three times overall inflation in 2014.

That’s no fun, but most households have the flexibility to cope with price hikes when they’re limited to certain categories of products and overall inflation is low, as it is now. Here are four reasons rising food prices aren’t nearly as threatening as they may sound:

The price of other things has been falling. Food accounts for about 13% of a typical family’s spending, but housing accounts for about 33% and transportation 17%. Housing costs have risen by a modest 2.5% during the last year, according to government data, while transportation costs have fallen by 2.3%, led by a big drop in gas prices. Meanwhile, the cost of durable goods (cars and other big-ticket items) has fallen by 1.1% during the last year, with appliances (a subset of durable goods) down 3.5%. So higher food costs are being offset by lower costs for other things. These two tables, based on data from the government's Bureau of Labor Statistics, give an overview of where prices are rising and falling:

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Source: Bureau of Labor Statistics

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Source: Bureau of Labor Statistics

Consumers can substitute cheaper foods for more expensive ones. People do this all the time, without even realizing it. Meat prices are up 3.6% from a year ago, for instance, but cereals (think pasta) are down 0.6% and fruit and veggie prices have fallen 0.4%. There are also a bewildering array of options in the typical supermarket that let shoppers trade down to generic brands, stretch foods with less expensive fillers and find other ways to economize. Not to mention discount clubs, loyalty programs that help shave costs and plain old coupons. If you really need to cut costs, you can.

Wholesale food inflation doesn’t usually hit consumers. But it can get a lot of media attention all the same. The Journal story about surging prices, for instance, points out that the wholesale cost of Arabica coffee has risen by 72% since the end of 2013. But the retail price of beans -- what you'd pay for a bag at the grocery store -- has fallen by 1.2% since then, and by 8% during the last 12 months. Wholesale prices of many food items -- sugar, corn, oats, meat, soybeans and so on -- are heavily influenced by traders and speculators, whereas retail prices are typically determined by what consumers are willing to pay. Most retailers are accustomed to wide swings in wholesale prices and know it’s difficult to pass those on to consumers.

The real problem isn’t rising prices…. It’s stagnant incomes. The latest numebrs show that disposable income, adjusted for inflation, rose just 0.7% in 2013. In other words, the typical family is barely keeping up with inflation, and if they have to spend an unusually large portion of their income on things like food that are rising more than overall inflation, they’re actually falling behind. We’re in a period of surprisingly low inflation at the moment. But it’s also a time when jobs are scarce, living standards are threatened and many consumers simply lack the money to spend the way they used to. In that kind of environment, everything can seem expensive.

Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.

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