Food Is Still Cheap, Now…

There’s been much written in the financial and economic blogs about the prospect of inflation and it’s effect upon the American middle class, and much of it is angst-ridden and full of doom.  But prices are trending upwards for food – I track a marketbasket of 46 different grocery items – and it helps to keep some sense of perspective.  That having been said, I read Michael Deane’s view of food inflation in the SFGate and while I appreciate the attempt to place it in perspective, it misses the practical point.

According to Deane, and he’s technically correct, food prices aren’t the boogeyman issue since Americans spend far less for food – as a percentage of income – than in most other areas of the world.  There are some regions where food accounts for upwards of 40 – 50% of the family’s budget, far higher than what an American family typically pays.  Reading Deane’s article, the sense is that some prices will rise, but they aren’t the cause for concern since we can always rejigger what we presently purchase.  Besides, there’s so much more that we can conceivably handle given the little that we comparatively pay already.  But he views the issue too narrowly.

  • We’ve built a highly complex economic system – almost chaotic in the scientific sense – in which things are connected in an intricate web.  Why does something which occurs in Fukushima have a bearing on next year’s homeowner’s insurance rates?  Foodstuffs are woven into the web and the disgruntled Arab student waving his arms in Saudi Arabia most definitely creates a breeze in the bread aisle.  What is affected elsewhere will probably find its way into the food arena.
  • Many Americans, particularly parents, are scared because they understand that the average income is flat at best and the economic future for our children is not as good as it was for future generations.  This means that there isn’t likely to be as much to go around to cover a familly’s budget.
  • Deane’s article states that inflation is expected to be at 2%, but expected by whom?  In November, 2010 I began to track the cost of food at the retail grocer level via the PracticalDad Price Index, which had a marketbasket cost of $178.39.  By January, 2011 the marketbasket cost had risen to $179.38 and by April 1, the price index rose further to a cost of $181.91.  On a year-to-date basis of January to April, this is an increase of $2.53, or 1.41%.  Annualize this and we’re at a food inflation rate of 5.64%, almost 3 times what’s "expected".  This is hard data drawn from a survey of three independent and unrelated grocery stores.
  • Let’s apply this inflation rate to real-life for the more than 44 million Americans enrolled in the federal SNAP (formerly Food Stamp) program.  The average monthly SNAP benefit was $133.79.  Since the rate of inflation compounds – it builds upon the previous year – the effect would appear like this.


Effect of Constant 5.64% Inflation Upon Average SNAP Monthly Benefits
Year % Inflation Adjusted Inverse SNAP Benefit Buys
now   1.00 1.00 133.79 133.79
1 5.64 1.0564 .946 133.79 126.56
2 5.64 1.116 .896 133.79 119.87
3 5.64 1.179 .848 133.79 113.45
4 5.64 1.245 .803 133.79 107.43
5 5.64 1.315 .760 133.79 101.74
  • The effect of only a 5.64% inflation rate upon the SNAP benefits shows that by the end of five years, the average person would only be able to purchase what can be bought now for about $102, or a full quarter less.  Critics can contend that this is a static analysis since SNAP benefits will certainly increase, so "it won’t be so bad…" but consider that the government benefit increases are based upon the Consumer Price Index, which is reported exclusive of food and fuel.  Any increases based upon CPI will certainly increase the monthly benefits but at a far lower rate than that of actual food inflation.  Consider what’s going through the minds of people who don’t yet qualify for these benefits and have children.
  • Inflation is not only a monetary phenomenon but also a psychological one, and fear feeds into that.  You can’t fund the necessary and useful projects if everyone is spending their dollars on food and items now for fear of what it will cost a month, week or day in the future.  Like the old fable, our society changes from the proverbial ants preparing for the future to the grasshoppers that live in the moment and are reduced to penury for having eaten everything.
  • We’re a society that’s been programmed for more than three generations to consume and our economy is now composed of about 70% end-stage consumption spending.  Individuals and families will be faced with far harder choices than our grandparents and as spending from flat family incomes shifts back to food, there will be a significant downward effect upon the national economy. And frankly, we have to now push the process of rethinking consumption and in the era of HSN and QVC, that will be no small feat.

So while we’re in good shape relative to a family in Kenya or Mumbai, the problem is that we aren’t in Kenya or Mumbai.


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