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The Good News You Missed on Food Prices

May 07, 2008

By Steven Malanga

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Within the last few days, stories of a worldwide food crisis have given way to alarm in the media about America’s own grocery prices. Newspapers, nightly news programs and talk shows are filled with tales of how spiking demand worldwide has led to supermarket price hikes that are said to be squeezing people’s budgets. A few examples:

• Numerous media outlets quoted testimony from a Congressional hearing on food prices last week in which Sen. Charles Schumer (D-NY) said that walking the aisles of his local supermarket he was “floored by the prices” and was especially worried by “prices of the staples we all depend on for a healthy diet.” He listed a whole series of products that have seen double digit price increases from March 2007 to March 2008.

• A story in Friday’s Chicago Tribune talked of “desperate” money-saving tactics grocery shoppers are resorting to in order to keep down their weekly food bill.

• An Associate Press story the day before told of consumers who are now stockpiling food as a hedge against future inflation as well as potential shortages.

If you know anything about food prices in America, you know that what all of these stories lack is a serious dose of context. Over the last several decades groceries have been one of the real bargains in America, and the average rate of inflation on dozens of food items tracked by the U.S. Bureau of Labor Statistics has consistently been less than increases in the purchasing power of the average American family. As a result, the percentage of income that families devote to their food purchases has fallen sharply since the food inflation of the 1970s, even though more and more Americans (like Sen. Schumer’s family, judging by his testimony) have opted for buying more premium-priced items, like organic foods. Recent price spikes have done little to reverse years of moderation in the cost of food.

The good news started for most consumers in the 1980s and has continued since then. In the decade before, food prices rose at average annual clip of 8.4 percent, which was more than a full point above the overall inflation rate. But in the 1980s, the rate of inflation on food items declined to 4.6 percent annually, nearly a point below general inflation. That downward momentum continued in the 1990s, when food prices rose by a mere 2.8 percent annually, a trend that has pretty much continued in the new century until the last few months.

You probably missed the many media stories over the years about what a bargain food has become, or maybe there simply weren’t many such stories. But one result of these very moderate increases in food prices is that we are paying less, sometimes considerably less, relative to our purchasing power today for a whole range of products, including many staples.

A pound of ground beef, for instance, cost $1.86 in March of 1980, which is, according to the BLS’ own cost-of-living calculator, the equivalent of $4.82 in buying power today. But in March of this year (the most recent monthly data, on which most pricing stories are based), a pound of ground beef cost on average just $2.82 in the United States.

A pound of fresh chicken, one of a dozen food basics that the BLS includes in its most-requested data series, was 67 cents in 1980, the equivalent of $1.71 in buying power today, though the actual average cost of chicken in March 2008 was just $1.17 a pound. A pound of coffee was $3.25 in 1980, the equivalent of $8.42 today. While you might pay that much for a pound of Starbucks coffee, the average retail price of coffee in American stores in March 2008 was $3.48.

Even among those items where price hikes have been steepest in the last year, consumers are hardly very far behind. Price spikes on flour have received enormous media attention, with Sen. Schumer observing that the cost of flour is up a “whopping” 32 percent in a year. But the increase comes after years when the price of flour was relatively stable. As a result, in March, a pound of flour cost 49 cents, compared to 21 cents a pound in 1980, which is the equivalent of 55 cents in today’s dollars.

In some cases, prices are rising now after having fallen. Sen. Schumer complained that bananas are up in price about 13 percent in the last year. True, but the Senator forgot to mention that the inflation rate for bananas has been negligible for years, and that in fact the price of a pound of bananas dropped by nearly 6 percent in 2004. That’s why bananas, at 59 cents a pound in March, are still a bargain compared to bananas which on an inflation-adjusted basis cost consumers 91 cents in 1980.

These differences are significant enough once you add them all up that they have helped produce a sharp decline in the percent of household income that the average family is paying for food. Since 1984 the BLS has tracked the impact of spending on dozens of categories—from groceries and energy to apparel, health care and entertainment—on family budgets. In 1984 the average family spent 9.3 percent of its after-tax income on food at home, but by 2006 (the latest year statistics are available) that percentage had fallen to just 5.9 percent of after-tax income. Even with the recent price hikes, Americans are spending on average about a third less of their family income on food than they did in 1984, and since food is a staple that everyone purchases, the gains have benefited families across the income spectrum. Among families in the lowest income quintile, spending on food has shrunk from 38 percent of after-tax income to 21 percent since 1984. Those in the second lowest quintile are spending 10 percent of family income on food, compared to 17 percent in 1984.

None of this is surprising to anyone who has spent considerable time in supermarkets over the years, or has watched how food retailing has changed. Consumers have an array of new stores to pick from that offer bargains on food, like warehouse clubs. Technology has driven up productivity in the food distribution network, cutting the cost of deliveries and keeping stores in-stock but not overstocked. The most successful food retailers today operate with net margins that are less than one percent of sales.

America’s low food prices, in other words, have been earned, not gifted from on high. But perhaps after nearly 30 years, some consumers (and much of the media) assume that we’re simply entitled to such low prices every year. Sen. Schumer probably best exemplified that sense of entitlement when, during his testimony, he complained that his daughter is now paying $12 a pound for organic chicken. Given that there’s no scientific evidence that organic foods are any better for us or any safer than other foods on store shelves, it’s hard to work up outrage about someone spending $12 for something that on average costs $1.17 a pound.

This year, economists are predicting food inflation of about 4 percent, which is higher than recent history, but hardly represents hyperinflation. The bad news is we haven’t seen this level of inflation on food since 1990. But that’s the good news, too.

Steven Malanga is an editor for RealClearMarkets and a senior fellow at the Manhattan Institute

Original Source: http://www.realclearmarkets.com/articles/2008/05/good_news_on_food_prices.html

 

 
 
 

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