Wednesday, May 14, 2008

As Share of Disposable Income, Food Is Still Cheap

Just like with gas prices, we hear a lot about food prices being at record levels, but we don't hear as much about disposable income also being at record high levels. How do food prices compare to disposable personal income?

According to data available from the USDA, expenditures on food as a share of disposable personal income have decreased from a high of 25.2% in 1933 to a low of 9.7% in 2004 (see chart above). In 2005 and 2006, there were insignificant increases to 9.8% and 9.9%, respectively.

Although data for 2007 and 2008 are not yet available, Eugene Volokh provides estimates of relatively insignificant increases for those years. For example, food prices increased by 3.9% in 2007 according to the BLS, and disposable personal income increased by 5.4% in 2007 according to BEA data (available here via FRED). Allowing for a 1.1% increase in population, the percentage of disposable income spent on food would remain unchanged at about 9.9% in 2007.

Through March 2008, the CPI for food increased annually by 3.9%, and disposable income increased by 4.1% from a year ago. Allowing for a 1% increase in population, the percentage of income spent on food has increased to 9.98%, a fairly small increase. Through April 2008, annual food inflation was slightly higher, about 5%, which could bring the percent of disposable income spent on food to about 10% in 2008. But even at 10% of disposable income, spending on food would still be below any year of the 1990s, and way below any previous year or decade, and about half of the spending on food during the early 1950s when spending on food was almost 21% of disposable income.

Even with the recent increases in some food prices, food is still relatively cheap and affordable, when spending on food is measured as a share of disposable income. And this analysis suggests that any comparisons between today's economic situation and the 1930s and the Great Depression are pure nonsense and nitwitery.


At 5/15/2008 8:19 AM, Anonymous Anonymous said...

Shhh, don't tell anyone, but the price of wheat has dropped 30% in the past month. Yes, wheat, the staple of the American diet.

At 5/15/2008 11:10 AM, Blogger spencer said...

If you look at food as a share of personal consumption expenditures (PCE)you get a different set of numbers.

Food fell from 32% of nominal PCE
in 1947 and to just under 21% in the 1970s and just under 14% last year. This is a significant drop, but not nearly as great as the ratio to income implies.

Part of the reason that foods share of consumption is about double its share of income probably stems from the rapid increase in income inequality in recent years.


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