David R. Henderson  

Mark Perry: Food Prices Have not Risen Much

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Coase on Regulating Goods and ... Galton's Demented Idea...
Annual increases in food prices over the last four years have averaged less than 2%, which is the lowest average food inflation rate over a 48-month period in almost 50 years. Although it might seem like food prices have been rising faster recently than in the past due to either temporary increases in the prices of certain foods or because of short periods of price volatility, the average increase in food prices of less than 2% over the last four years is the lowest in several generations.
This is an excerpt from Mark Perry, "Americans love to complain about rising food prices; here are three reasons they should stop whining," Carpe Diem, September 14, 2013. The whole thing is excellent.

In the comments, someone writes:

About three years ago, food was going up pretty significantly. I know they use substitution now if Filet Minion goes up, it isn't inflation cuz folks will just start eating chub hamburger instead - so it was going up much faster than the government actually states - since the difference in quality of the substitution is not accounted for.

Fortunately, another commenter points out in response what the Bureau of Labor Statistics says about this. Here's the relevant excerpt from the BLS:
When the cost of food rises, does the CPI assume that consumers switch to less desired foods, such as substituting hamburger for steak?

No. In January 1999, the BLS began using a geometric mean formula in the CPI that reflects the fact that consumers shift their purchases toward products that have fallen in relative price. Some critics charge that by reflecting consumer substitution the BLS is subtracting from the CPI a certain amount of inflation that consumers can "live with" by reducing their standard of living. This is incorrect: the CPI's objective is to calculate the change in the amount consumers need to spend to maintain a constant level of satisfaction.

Specifically, in constructing the "headline" CPI-U and CPI-W, the BLS is not assuming that consumers substitute hamburgers for steak. Substitution is only assumed to occur within basic CPI index categories, such as among types of ground beef in Chicago. Hamburger and steak are in different CPI item categories, so no substitution between them is built into the CPI-U or CPI-W.

Furthermore, the CPI doesn't implicitly assume that consumers always substitute toward the less desirable good. Within the beef steaks item category, for example, the assumption is that consumers on average would move up from flank steak to filet mignon if the price of flank steak rose by a greater amount (or fell by less) than filet mignon prices. If both types of beef steak rose in price by the same amount, the geometric mean would assume no substitution.


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COMMENTS (5 to date)
CC writes:

Wow, some myths never die. Of course, it doesn't help that the WSJ published this steak myth as fact on their op-ed page. It made me doubt everything I read in the WSJ. (And I like the WSJ!)

Ken from Ohio writes:

This is very interesting

But the data includes spending on food consumed a home (6.6% of disposable income) and excludes spending on food NOT consumed at home.

My interpretation of the data is that Americans spend about 10% of disposable income on food. With 6.6% spent on food consumed at home and the remainder (3.4%) spent on food consumed outside the home.

Spending only 10% of disposable income on food is down from about 25% in the 1950's.

The fact that Americans spend so little of their income on food is probably related to two factors

1): The efficiencies of food production have made food cheaper
2): American incomes are higher

Another interesting point is that Americans spend so much (about a third) of their food budgets on food consumed outside the home.

My interpretation of this is that the franchise fast food and "ready to eat" industry has become so efficient that these food items are now cost competitive with the grocery store

MingoV writes:

I believe that a broader food list would show significantly more than 2% annual inflation.

The CPI food list does not represent modern buying patterns. On a typical weekly shopping trip, my family buys only half the items on the list. Food categories that should be on the list include cheese, yogurt, breakfast cereal, peanut butter, crackers, cookies, pasta, canned soups, nuts, frozen fruits and vegetables, etc.

Cheese, nut, peanut butter and yogurt prices increased a lot in the past two years. Breakfast cereals and crackers had moderate price increases. Cookie prices went up so much that we cut purchases in half. Given the above, I find it hard to believe that overall food prices for typical households increased only by 4% over the past two years.

ThomasH writes:

"Wow, some myths never die. Of course, it doesn't help that the WSJ published this steak myth as fact on their op-ed page."

Perhaps it is this mistake about inflation that has led the WSJEP to be less favorable to aggressive monetary and fiscal policies to stimulate a more rapid recovery?

mobile writes:

Of course, in real terms, as P.J. O'Rourke is fond of saying:

Agricultural prices have been falling ... not since the 1920s, but since the Paleolithic Age. And it's a good thing. Otherwise, we wouldn't grow food, we'd be food.

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