Practical Dad

What Does Food Inflation Really Mean?

Everybody talks about incipient inflation and what it really means, and the most recent data from China - suspect that it is - indicates that the consumer prices there rose  4.9% year over year from January of 2010.  When I mention suspect, bear in mind that they rejiggered their marketbasket and had it been left alone, the rise would have been 5.1%.  So what does it mean to the typical family when they see increasing inflation hitting the grocery stores?  Percentages can be scary, but what's the real impact?

Let's play with the use the Chinese rate of 4.9% and extrapolate it with some American data. 

First, remember that inflation means that there's a decline in the buying power of the currency so that with the same amount of money, you're able to purchase less than you could before.  If the inflation rate from one year to the next is 4.9%, then the same amount at the later date is 4.9% higher; the inverse is that if you maintain the amount spent as a constant, then you're only able to purchase that much less.

Let's work through the numbers.  According to Bureau of Labor Statistics courtesy of creditloan.com, the average American "consumer unit" of 2.5 people spent $3753 annually in 2009 for food at home for a monthly average of $312.  Bear in mind that when dining out was included, the total annual amount on food rose to $6372.  For our purposes, we'll use the $312 as a baseline while understanding that if you've got kids, you're spending more per month than this example bears out.

 

Effect of Constant 4.9% Inflation Upon $312/mo Budget
Year % Inflation Adjusted Inverse Budget Buys
now   1.00 1.00 312.00 312.00
1 4.9 1.049 .953 312.00 297.34
2 4.9 1.100 .909 312.00 293.61
3 4.9 1.154 .867 312.00 270.50
4 4.9 1.211 .826 312.00 257.71
5 4.9 1.270 .787 312.00 245.54

 Assuming all else remains the same, the impact upon the food budget is significant as a $312 monthly budget only purchases what you can buy now for $245. 

The other problem is that income is at best, flat and for the lower wage groups, actually dropping.  According to the BLS at the same site, the average pretax income of that odd 2.5 average consumer unit declined from $63,091 in 2008 to $62,857 in 2009.  Likewise, inflation is a nebulous and inexact thing and to think that it only happens in an orderly and predictable manner is like saying that you can capture a specific number of insects with a single swoop of the butterfly net.

So where do we begin to cut?  The first source is most likely the amount that's spent on dining out, which was about $218/month for the consumer unit.  And after that comes a rejiggering of the family menu as brand names go by the wayside in favor or store brands and then a shift in the menu to lower cost alternatives.  And that's for families - not consumer units - who still some leeway and aren't already to the point of doing without or going to the food bank.

When this does start to really percolate through the domestic economy, the final acts will be a complete realignment of our priorities as we reevaluate what's truly necessary versus that which we've come to consider as necessary.

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