If you are bothered by rising food costs, there are some simple steps you can take: Go out to eat less. Make more meals from scratch.
But wait, you might reply. Aren’t some of the sharpest price increases in staple commodities rather than in restaurant menu prices?
That is true, but stay with me.
There are some unappreciated quirks in how we measure prices of food and other items for consumers.
The Consumer Price Index is intended to measure just that, consumer prices. To do this, the Bureau of Labor Statistics has to record prices for thousands of items each month. But it first must decide what set of items accurately represents consumer spending and how important each item is relative to all the others.
This is complicated by the fact that what consumers buy changes over time. We don’t buy many typewriter ribbons, buggy whips or garter belts anymore. We do buy iPads, frozen microwaveable entrees and Blu-ray discs. We eat only a fifth as much lamb per person as when I was born, but about 10 times as much pasta.
This means the BLS periodically must adjust the “market basket,” or list of items whose prices are measured each month, and adjust the “weight” of each item in computing the overall index.
Over the near century since the CPI was first tabulated, the average proportion of consumer income spent on food has dropped steadily over time for various reasons. Incomes grew strongly over much of that period but especially in the first three decades after World War II. Technology in farming and food processing reduced food production costs, adjusted for inflation. Such real price declines were sharpest for staples or for ingredients like flour, sugar or fats and oils.
This means the weight given to food in price indexes like the CPI or the GDP Deflator is smaller than in the past. It would have dropped even more if we were eating things in the same way our grandparents did. But we are not. We eat more of our meals outside the home. More of the food eaten at home has higher processing levels, so it can be cooked and served with less work or in less time. Food itself is a smaller fraction of our food spending. Labor and processing are larger.
So even though prices of some unprepared foods like sugar and flour have gone up markedly in recent months, their inflation-adjusted prices remain far lower than in the days of our parents or grandparents. And eating most meals prepared at home, processed or unprocessed, remains cheaper than eating similar meals in restaurants. So if you are pinched by rising food prices, eating at home more and making more meals from scratch will ease your budget.
This does not mean complaints about rising food prices are unjustified whining. We eat out or we eat processed foods for a reason. We value our time, and many people work long hours outside the home. Time spent cooking and cleaning up afterward is not free.
But this does mean that any given percentage increase in the CPI is not exactly the same as an increase in the cost of living per se, even though the CPI is used, especially by the government, to calculate “cost-of-living increases.” If people eat out less or cook from scratch more frequently in an effort to make their food budget work, they may be worse off in terms of their time or happiness. But their actual cash outlays for food have not risen as much as the food component of the CPI.
This may be better explained by thinking about what might happen if the price of chicken rose sharply but the price of other foods stayed the same. People would buy less chicken and would buy more of other meats or nonmeat protein sources.
Our overall happiness may fall a bit because we are eating beef when we would rather eat chicken at some particular meal, but our actual grocery bill will not go up much. The CPI for that month, however, would be calculated using the historic ratios of chicken and beef consumption. Thus, the tabulated CPI index number rise would be larger than the increase in actual spending by most households.
Yes, over time the weights assigned to beef and chicken in computing the price index will adjust if the new consumption patterns persist. But in the short run, the increase in the CPI overstates the true increase in the “cost of living” itself.
Remember that the CPI is an average for the nation as a whole. (Read the fine print and you find the most commonly cited CPI is for “all urban consumers.”) But there is much variation around the mean, and thus different households are affected differently by any set of price rises.
The percentage of total household spending going to food has dropped, on average. But it remains much higher for poorer people than richer ones, as has always been true. Any households that cook most of their own meals actually faced more favorable price trends than others for many years. But they are being hit harder now as price spikes of farm commodities hit some ingredients harder than overall food prices.
© 2011 Edward Lotterman
Chanarambie Consulting, Inc.