Food Inflation and the Consumption Patterns of U.S. Households
McGranahan, Leslie, Chicago Fed Letter
In July 2008, food prices were 6.0% above their July 2007 level. This article examines how different household types have been affected by the recent rapid rise in food prices.
Increases in food prices have been grabbing headlines recently. In this Chicago Fed Letter, I investigate the ex- penditure patterns of different types of households to discover which house- holds have been most affected by food price changes. I find that food price increases have had a more dramatic effect on the purchasing power of low-income households than that of high-income households. This is largely because low-income households concentrate more of their total budgets on food and spend relatively more on food consumed at home.
Figure 1 shows that there have been periodic episodes of high food inflation over the past four decades. However, a number at 6.0% or higher was last seen in 1990. The figure also shows that food inflation was substantially higher than it is today in the mid-1970s and from 1978 through 1980. The gap between food price changes and price changes for other goods has also been growing. For example, food inflation was 6.0% from July 2007 through July 2008, while core inflation (which excludes food and energy prices) was 2.5%. This difference of 3.5% was the largest gap reported since early 1979.
The recent increase in food prices has not been uniform across all food categories. The U.S. Bureau of Labor Statistics (BLS) publishes price changes for over 100 food items and for 17 categories of food expenditure.1 Figure 2 shows that, among these categories, the largest price increases have been in eggs, fats and oils, bakery products, fresh vegetables, and cereals and cereal products.2 Price increases for pork and other meats have been less than or equal to core inflation. But price increases in every other food category have been higher than core inflation.
There has also been a difference in price increases depending on where food is consumed. Prices for food at home are up 7.1 %, while prices for food away from home are up 4.6%. Prices for food at home have historically been more volatile than prices for food away from home. And prices for food at home have tended to increase more quickly when food prices are increasing quickly.
Reasons for food price increases
Food prices have been going up for a number of different reasons. One culprit has been the rise in the price of energy and its effects on food. The energy effect operates in two ways. First, oil price increases have led to increased demand for ethanol and other alternative energy sources. The increased demand for corn to produce ethanol has led to an increase in the price of corn, as well as an increase in the price of other agricultural commodities, because acreage planted with those commodities has been replaced with corn. Second, energy price increases affect food prices through crop production, which is fairly energy intensive.
Another factor behind the run-up in food prices is the decline in the value of the U.S. dollar. This has increased the cost of imports and increased foreign demand for U.S. agricultural output. Foreign demand for food products has also grown because of increasing wealth, particularly in China and India.3 Individual food categories have also been subject to independent influences. For instance, pork prices have not grown as quickly as other food prices in part because of the increases in supply resulting from a successful vaccination program for circovirus. Fresh fruit price growth has partly been due to poor weather in countries producing bananas.
The lower growth in prices of food away from home likely arises from the relative difficulty of adjusting these prices combined with the reluctance of restaurants to raise prices on cashstrapped patrons who may then choose to eat at home.
Food consumption patterns
How households are affected by increases in food prices depends on two factors. …