Fed's Favorite Inflation Gauge Confirms Food Price Inflation Worse Than Overall Inflation
Eating Is An Expensive Hobby In 2022
Friday the Bureau of Economic Analysis released its June Report on Personal Income and Outlays, which includes the Federal Reserve’s favorite inflation gauge, Personal Consumption Expenditures. As with the Consumer Price Index, PCE shows inflation is running rampant in this country, and that the Federal Reserve’s interest rate hikes to date have not proven effective.
The PCE price index also confirmed another aspect of the CPI: food price inflation is far worse than headline consumer price inflation:
From the preceding month, the PCE price index for June increased 1.0 percent (table 9). Prices for goods increased 1.5 percent and prices for services increased 0.6 percent. Food prices increased 1.0 percent and energy prices increased 7.5 percent. Excluding food and energy, the PCE price index increased 0.6 percent. Detailed monthly PCE price indexes can be found on Table 2.3.4U.
From the same month one year ago, the PCE price index for June increased 6.8 percent (table 11). Prices for goods increased 10.4 percent and prices for services increased 4.9 percent. Food prices increased 11.2 percent and energy prices increased 43.5 percent. Excluding food and energy, the PCE price index increased 4.8 percent from one year ago.
In the month of June, the PCE price index shows year-on-year food price inflation running nearly double1 consumer price inflation. Food prices are rising twice as fast as everything else.
Let that sink in.
Inflation Is Distortion
The PCE price index is but the latest reminder that inflation is not merely rising prices but price levels distorted from one another, throwing both the personal budget and the overall economy off kilter.
When we look at the PCE’s measure of food price inflation for 2022, one reality is made clear: month-on-month food price inflation, as measured by the PCE price index, has out paced the headline inflation gauge almost every single month for 2022.
Nor are the imbalances necessarily small: the PCE price index showed overall inflation less than one-fifth that of food price inflation in April.
The Consumer Price Index also shows food price inflation running significantly higher than overall consumer price inflation.
What is particularly concerning about the CPI data is that it indicates food price inflation is rising faster than overall consumer price inflation throughout 2022 to date. That is not a good sign for food budgets for the remaining half of 2022 and beyond. The USDA is forecasting elevated food price inflation throughout 2022 before dropping back closer to historical norms within the CPI index for 2023.
In 2022, food price increases are expected to be above the increases in 2020 and 2021. In 2022, food-at-home prices are predicted to increase between 10.0 and 11.0 percent, and food-away-from-home prices are predicted to increase between 6.5 and 7.5 percent. In 2023, food-at-home prices are predicted to increase between 2.0 and 3.0 percent, and food-away-from-home prices are predicted to increase between 3.0 and 4.0 percent.
For specific food items, food price inflation may continue at an elevated pace into 2023 and beyond.
If realized, the latest US production estimate for hard red winter wheat, relied on to make bread flour, would be the lowest since at least the mid-1980s due to a lack of rain. The size of the crop being harvested in states like Kansas has been slashed after drought that baked fields farther north last year hit parts of the Central Great Plains.
There is more volatility coming in wheat and bread prices that will likely last well into next year — if not longer, according to Arlan Suderman, chief commodities economist at StoneX Financial.
The price of a meal is going to keep rising from quite some time yet, if the forecasts are even close to reality.
Food Price Inflation Is Different
Consumers are able to more or less adapt to rising prices of many goods simply by buying less—one of the reasons inflation is toxic to an economy is that it invariably results in consumers paying more but buying less, thereby diminishing overall economic output.
Food price inflation is different. Food is not only a necessary good, but, to a large degree, it is necessary to have the same quantity of food regardless of price. A family’s nutritional needs do not change merely because prices do. Even if food is more expensive, people still need to eat.
Consequently, when food price inflation becomes elevated, people are more likely to respond not by consuming less, but by making greater use of food banks, church food pantries, and other low-cost or no-cost sources of food—which is exactly what has been happening across the United States.
In the past month there has been a steady stream of reports from pantries across the US stating that they are now hitting record high demand and record low supply. From New York to Wisconsin to Ohio to Missouri to Florida to Arkansas to California and beyond, pantries are running out. On top of that, it's the middle of summer – The busiest time for food banks and the Salvation Army is during the winter holidays.
Paradoxically, the same food price inflation which increases the demand for charitable food sources also reduces how much food charities have to offer.
The majority of pantries indicate that they are most in need of cash donations and that these have started to fade out. When it comes to necessities, most people will not or cannot reduce the frequency of their purchases. Food, gas, housing, utilities, etc. are fixed income costs, and when these costs rise workers must cut costs elsewhere. Charities are usually the first to see the chopping block.
Thus food price inflation is a double whammy for consumers: Not only does it make food itself more expensive, it reduces the availability of alternatives to reduce the immediate cost of food for a household. The demand shock of food price inflation for this reason results in a supply shock of varying severity for food bank and food pantries.
As I have pointed out previously, today’s food price inflation is tomorrow’s food insecurity, with hunger looming for the day after. When food price inflation accelerates, the distance between food price inflation and hunger shrinks—and is shrinking.
Restaurant Margins Are Getting Squeezed
Within the restaurant industry, there is an additional problem: food is essential to the business, and the cost of running a restaurant is directly impacted by food price inflation, as Tammy Germain, proprietor of Stan’s Restaurant in Mt Pleasant, Michigan, is finding out personally.
“We’re struggling,” Germain said. “We have a full restaurant, but it doesn’t mean you’re getting rich.”
The restaurant orders food on a weekly basis, and Germain has seen prices doubled – especially for eggs.
“It’s all the cooking oil, everything that we need to make breakfast. Pancakes, syrup, our to-go boxes,” she said. “We used to pay like $19 for 15 dozen. We are now paying $56 dollars.”
Thus, for restaurant owners—and, by extension, for restaurant workers—there is a third squeeze place upon them by food price inflation: reduced income or even the loss of income. For them, food price inflation not only means paying more and buying less, but also having less money with which to pay.
The restaurant industry also highlights the reality that consumer price inflation means paying more and buying less. During the second quarter of 2022, restaurant visits decreased, as did online ordering from restaurants, even as overall consumer spending at restaurants rose:
Feeling the impact of high inflation and rising menu prices, U.S. consumers cut back on their restaurant visits in the second calendar quarter of 2022, reports The NPD Group. Physical and online restaurant traffic declined by 2% in the quarter versus a year ago, -6% below the pre-pandemic level in the same quarter in 2019. Consumer restaurant spending, which reflects higher costs in contrast to increased visits, was up 2% in the quarter compared to the same quarter year ago and increased by 3% versus the pre-pandemic second quarter in 2019.
Consumers today are spending 3% more on restaurant meals than in 2019 while buying 6% fewer meals—literally paying more to buy less.
Comments from multiple restaurant chains, including McDonald’s and Chipotle, confirm the NPD Group’s analysis.
Both McDonald’s and Chipotle have reported lower sales from their less-affluent customers amid the historic inflation that’s eroding consumers’ bank accounts.
“We’re definitely seeing a slowdown in their purchase frequency,” Chipotle CEO Brian Niccol told Bloomberg on Tuesday. “You’ve got higher gas prices. Everything is more expensive.”
Similarly, McDonald’s said its lower-income customers are avoiding more-expensive combo meals in favor of less-expensive menu items, according to Bloomberg.
Markets Do Not Give A Damn. Neither Does The Fed
In a moment of epic tone-deafness, Bank of America expressed to its investor clientele the “hope” that this situation will actually get worse for American workers and consumers, as the Fed’s interest rate hikes are anticipated to increase job loss and reduce job opportunities across the country.
The memo, a “Mid-year review” from June 17, was written by Ethan Harris, the head of global economics research for the corporation’s investment banking arm, Bank of America Securities. Its specific aspiration: “By the end of next year, we hope the ratio of job openings to unemployed is down to the more normal highs of the last business cycle.”
Readers will recall that I have previously pointed out how Richmond Federal Reserve President Tom Barkin expressed similar sentiments in June (emphasis mine).
Barring an unanticipated event, I see rising rates stabilizing any drift in inflation expectations and in so doing, increasing real interest rates and quieting demand. Companies will slow down their hiring. Revenge spending will settle. Savings will be held a little tighter. At the same time, supply chains will ease; you have to believe chips will get back into cars at some point. That means inflation should come down over time — but it will take time.
Both Wall Street and the Fed have the same solution for inflation, even food price inflation: workers should get less, earn less, and have less opportunity. Bank of America, like Tom Barkin earlier, merely said the quiet part out loud.
Relative to inflation, workers are earning less in real terms. Pay rises in June, according to the Bureau of Labor Statistics Employment Summary Report, amounted to barely half a percentage point (emphasis mine).
In June, average hourly earnings for all employees on private nonfarm payrolls rose by 10 cents, or 0.3 percent, to $32.08. Over the past 12 months, average hourly earnings have increased by 5.1 percent. In June, average hourly earnings of private-sector production and nonsupervisory employees rose by 13 cents, or 0.5 percent, to $27.45.
With official food price inflation for the month at 1 percent, that level of pay increase means workers lost money—and therefore dollars for the food budget—in June to inflation.
No doubt BofA and the Fed are very pleased with the situation.
The White House Does Not Understand Inflation
While all politicians are somewhat conveniently economically illiterate (how else to keep facts from getting in the way of a good talking point or pet policy?), the Biden Regime remains staggeringly so.
Witness the White House Press Secretary’s tweet fumbling and bumbling a rationalization of the June PCE data while completely ignoring the grim food price inflation data within.
Or the President himself suggesting that the current recession (which is the proper term for when the economy “slows down”) is somehow a good thing.
Not to be outdone by Twitter, the President remarked at a CEO summit that Americans were “down” because the Regime was no longer sending out $8,000 checks to individuals and households:
“If you’re making 120 grand and you get a check for eight grand, that’s a lot of money. and so it helped save a lot of people, in terms of getting thrown out of their homes and rental housing and a whole range of things,” Biden went on.
The president then posited that this year, there’s no direct government assistance to most Americans, making it feel like life is harder even if more people are working and winning pay raises.
To be clear, the US government has at no time issued any $8K checks to individuals under the rubric of pandemic relief.
While sentiment is quite relevant in projecting future responses to inflation, accurate projections require an accurate understanding of that sentiment—and no one has ever accused the Biden Regime either of accuracy or understanding in its commentaries on the economy.
Inflation Hurts. Hunger Hurts More
There is no escaping the inexorable progression from food price inflation to food insecurity to outright hunger. The more difficult it is for ordinary people to buy food, the less food they will be able to buy, which means at a certain point they will not be able to buy enough food to sustain life—at that point food price inflation has evolved through food insecurity into outright hunger.
Yet there is also no escaping the reality that a loss of income also leads to hunger, regardless of food prices—when the available money to buy food drops to zero all food prices become moot, inflated or otherwise.
While inflation has to be contained to prevent total economic chaos, to ignore the equally dire consequences of job and income loss on those most impacted by inflation is an almost psychotic level of disconnect from the reality that all policies have consequences. Stopping inflation by inflicting privation and even hunger on the least fortunate among us might be notionally successful, but the human cost of that success must not be ignored.
A civilized society does not blithely sacrifice some for the ease and comfort of others.
Wall Street and the Federal Reserve have conveniently forgotten this, for sacrificing workers is exactly what the Fed’s inflation-fighting rate hikes are intentionally calibrated to do.
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Many people argue that the Personal Consumption Expenditures gauge of consumer price inflation, as well as the CPI itself, severely understate actual inflation—arguments that contain more than a little merit. However, even if inaccurate, these indices still illustrate the distortions inflation brings to consumer prices overall, which is the primary point at issue here.