Carpe Diem

Refuting the false claim at The Federalist that ‘food inflation blows away wage growth.’ It’s just not true.

fed2Both Sean Davis and Ben Domenech at the web magazine The Federalist have used the chart above in their recent posts about food inflation here and here. As the title of the chart implies, Davis and Domenech are both claiming that “food inflation has blown away wage growth” since the end of the recession in June 2009.

But there’s a problem with that claim. Sure, certain food groups might have gone up in price over the last five years by more than the increase in average hourly wages. But a more realistic representation of what’s happened since June 2009 is shown in the chart below, and it’s just not true empirically that “food inflation has blown away wage growth.”

inflation2The blue line in the chart shows the 11% increase since June 2009 in the broadest CPI food category “Food and Beverages,” which is one of the eight major CPI groups according to the BLS, and includes (among hundreds of other items that cover all food and beverage groups): breakfast cereal, milk, coffee, chicken, wine, full and limited service meals away from home, and snacks (Note: This is a sample, see the full list of items here). It should be noted in any discussion about food prices that “food away from home” is almost 50% of total food spending for Americans, according to the most recent USDA data (see Table 10). Therefore, I’m using the most comprehensive measure of food and beverage prices, which would most accurately reflect the prices of food for the typical American household. Using different CPI measures doesn’t change the analysis much – the “CPI-Food” has increased 11.3%, “CPI-Food Away from Home” has increased the same 11.3%, and “CPI-Food at Home” increased 11.36%.

Here’s the key point – over the last five years, the BLS wage series “Average Hourly Earnings of Production and Nonsupervisory Employees: Total Private” has increased by 10.8% from $18.57 to $20.58 per hour (see red line in chart). Therefore, the broadest measure of food and beverage prices has increased by only slightly more (11%) than the increase in average hourly earnings (10.8%). Food inflation is not “blowing away wage growth” – it’s basically almost exactly matching it! The BLS wage series used here starts in 1964 and is the measure of hourly earnings used most frequently for historical analysis, given its 50-year history. A more recent measure of hourly earnings was introduced by the BLS in 2006 — “Total Private Average Hourly Earnings of All Employees: Total Private” — and that measure has shown a slightly lower increase in hourly wages since June 2009 of 10.4%, but is still just slightly below the 11% increase in food prices, and provides no statistical support for the claim that “food inflation blows away wage growth.”

Update: On an average annual compounded basis, wages have grown at a rate of 2.08% per year, just slightly less than the 2.11% annual compound growth in food prices. That 0.03% difference per year (1/33 of 1 percent) is negligible and provides no evidence that “food inflation blows away wage growth.”

Even more important than comparing wage growth to only one major CPI group (food and beverages), the chart above shows that overall consumer price inflation (CPI – All Items) has increased by 10.6% (see brown line in chart), which is slightly below the 10.8% increase in hourly earnings, meaning that there has been a slight increase in real, inflation-adjusted earnings since June 2009. Using the other measure of hourly earnings would indicate a slight decrease in real hourly earnings.

Bottom Line: Over the last five years, consumer prices, food prices and hourly earnings have all increased at almost exactly the same rate, and there is no statistical support for the claim that “food inflation blows away wage growth.”

31 thoughts on “Refuting the false claim at The Federalist that ‘food inflation blows away wage growth.’ It’s just not true.

  1. while it is certainly possible that the federalist cherry picked data, refuting it with CPI is problematic.

    CPI measures the price of a food basket of declining quality through substitution and makes assumptions about weighting that often have the wrong sign.

    it is not a great standard for food prices if you are trying to eat the same things.

    one can say CPI-food has not outpaced wage gains, but i, for one, would not accept that cpi-food and food inflation are synonymous.

    by design, cpi-food will always register a smaller change that the food price level.

    • Assuming no hanky panky in the food CPI – looking at BLT statistics both wages and food inflation have gone up 43%. Assuming product substitution and yes we are hurting more from higher food prices.

        • Both food and wages have gone 43% since 2000“…

          Well maybe not if the following is to be believed…

          Russell Sage Foundation Study (Found via the NY Times): In the aftermath of the Great Recession, net worth declined for everyone. The 95th percentile declined by over $200,000 in just two years between 2007 and 2009 (-12.8%), while the median fell by $28,000 (-28.4%).

  2. When you ‘refute’ a claim shouldn’t you, you know, actually refute what The Federalist is talking about. If I say the best car is a Ferrari you don’t write about a Trek bicycle to “refute” my claim.

  3. You did a really great job of refuting my point that food prices are rising faster than wages by…acknowledging that food prices are rising faster than wages. Way to show me who’s boss.

      • Let’s put it in the real world as opposed to metrics. Since 2009, I had my first raise this year – it was only 1.5%. Since September of last year, my weekly grocery bill has risen 10%. I have even cut out some of the higher priced things or reduced my consumption of them such as meat and eggs. Fresh fruits are becoming a luxury even in the summer because of the rising cost. So tell me, Mr. Perry how the Federalist is wrong in the real world. Also, I don’t eat out at all.

        • Individuals get lost in averages. Someone else got your raise and is eating your cheap groceries. You really can’t tell someone who brought the same paycheck home for years and now brings 3 bags of groceries home instead of 4 bags for the same amount of money that they aren’t hurting.

        • That is the whole point. The government assumes you will substitute cheaper items so inflation is not really inflation. Who care that in real life people have to buy less and substitute on sale hamburger for the Filet Mignon. This is the government – they want food inflation to look about the same as wage increases and will do anything to accomplish that.

  4. It could be that wages kept up with living costs in the period cited. But taxes could have risen too. Ergo, living standards fell.
    Wars have to be financed, and the national security bill is now $1 trillion a year…

  5. Sure wages kept pace with rice and beans but most people don’t eat just rice and beans. Look at anything with good nutritional value and your argument fails Mark. I’m surprised at you as I thought you were on board with Michele’s eating healthy push.

    • am i the only one who finds the weightings in that cpi index to be implausible?

      meat, poultry, fish, and eggs are only 23% of the food budget at home?

      man, i have sure never seen a grocery bill that looks like that.

      this is what happens when you let geometric weighting run for a while.

      all the stuff that is going up most gets under-weighted.

  6. I enjoy Carpe Diem on a regular basis, but when I hear “case closed” I get all the more motivated. I have not read the methodology of the BLS’s CPI indices in years. I hear that they have been weighted on the basis of ‘hedonic’ theory – but I have always worried that hedonics devolved into an ultimate regress, not a regression to the mean.
    I assume that any weighting of the basket items would be based on historically determined cross-elasticities; but, given enough time one could posit and demonstrate the cross-elastictiy of a ham sandwich and tofu treats.
    And, of course, there are no cross-elasticties for milk, eggs, pasta.
    There are sites on the Internet that claim one can eat tree bark. Recipes are given. Yummy. Euell Gibbons rocks!
    I haven’t suffered through any econ papers since the implosion of 2007 – 2009. I think I will read what is available, crank up Gretl and R and see what can be gleaned.

  7. The CPI, really?

    What’s better than an economic aggregate? A state manipulated economic aggregate.

    Perhaps next we can talk about how the Federal budget has been reduced.

    • What’s better? How about avoiding tired rhetoric backed by no econ research. Check the Billion Prices Project instead of relying on shadowstats & the Ron Paul curriculum.

      • What’s to research? That they are aggregating prices that have absolutely nothing to do with each other and claiming this has some special meaning?

  8. The Federalist pieces have a valid but narrow point: some individual food items have seen their prices go up faster than wages.

    Where they should have taken the argument is to then say that it’s understandable if households perceive higher inflation than reality, which is not exactly inventing fire (economists have known for some time that perceptions of inflation are often higher than reality) but would have been timely and useful.

    A thoughtful site would have made that argument. Instead, because it’s the Federalist, they opted for “so what if inflation is low?!” and “food prices are blowing past wages!”

    The answer to “so what” is that households are made of intelligent human beings who react and adjust their shopping choices to prices. The only way to take account of this is to do what Mark did, and look at how prices of food purchases overall have changed.

    Also, food prices change all the time, and quite meaningfully. For example, in the five years prior to March 2013, egg prices *dropped* an average of 1.01% annually according to the CPI; odds are that households bought more eggs during that time. But over the five years prior to June 2014, they rose an average of 5.86% annually. So households probably bought fewer eggs and bought more of something else (fresh vegetables maybe? Their prices rose 1.43% annually on average since June 2009 — below the rate of wage growth).

    The intelligent response to this is that Mark’s price index — the CPI — measures price growth in a fixed basket of goods and so won’t reflect the substitutions I talked about above. But note that we have a well-respected price measure — the PCE chain price index — which does adjust for these changes in spending patterns. The PCE index for “food purchased for off-premises consumption” has gone up 2.38% per year on average since June 2009, not significantly more than wages.

    You could also argue that just because households are changing spending patterns to keep costs down doesn’t mean they’re not hurt by rising prices in staple products. Totally fair! But food prices are very volatile — we see both big spikes and big drops all the time. Take milk for instance: the price of milk has risen 5% over the past year. But you would only have to go back to September 2012 to have found that milk prices had *fallen* by 3.33% over the previous year.

    • “it’s understandable if households perceive higher inflation than reality”

      i think it’s a bit more complex and less subjective that that.

      1. using CPI implies a basket of declining value, so, if you want a constant standard of eating, inflation is higher than CPI

      2. the problem with “average wage” is that gains are not evenly distributed. some might gain a great deal while other were flat or down. thus, many could be losing a great deal of buying power while the aggregates mask that.

      3. avg hourly wage is a bad metric for buying power. it only applies to those who are working. with lower workforce participation, the effects on a society may be quite different. it also presume constant hours worked.

      all in all, comparing hourly wages to food cpi seems a very fraught way to gauge food affordability, much less food inflation for a society.

      oh, and, fwiw prim, cpi-food is not a fixed basket. the weightings are changed all the time to reflect relative price moves (it assumes you eat more of what is cheaper) and items get swapped in and out as well. the grades of meat in it have steadily dropped as have the quality of the cuts.

      • Those points are fair, morganovich, although I believe I already addressed your substitution concerns. Also I would point out that it was the Federalist who chose to use CPI measures and average wages to make their point. My point is simply that, looking holistically, food prices are not “blowing past wage growth”.

        • prim-

          how do you feel you have already addressed my “substitution concerns”?

          CPI uses geometric weighting to shift the basket away form items that rise in price and toward those that drop. this causes serious compatibility problems as the basket of food keeps dropping in consumption utility.

          it is most definitely not a fixed basket of goods.

          meat, poultry, fish, and eggs are 23% of the basket for food at home. i don’t know about you, but that is not even half of what i see as typical, and that is the segment with the biggest price gains. beef and pork are all up double digits in a year. that category is exploding in price and being under accounted for.

          they have also taken out the top grades of meat and the better cuts and shifted more and more toward things like ground beef.

          such shifts, if one is actually measuring inflation, should have offsetting quality adjustments. they reduce the price of a new car in CPI (hedonic adjustment) to account for new features and higher quality. why should they not increase the price of a lower grade of meat being substituted because it is lower quality?

          these adjustments are deliberately one sided and make CPI read lower than actual changes in the price level.

          i’m not sure i understand your point about the federalist.

          they used wage growth and the price of specific foods. where did they “choose to use cpi”? that seems to have been mark’s choice.

          so, just what is this “holistic look”?

          i have not seen an evidence of such a thing.

          CPI is the opposite of a holistic look.

          it’s biased fiddling of the figures to arrive at a cost of living (very different from inflation) for a declining standard of food.

          • @morganovich
            > why should they not increase the price of a lower grade of meat being substituted because it is lower quality?

            Maybe because it isn’t lower quality. We can say a newer car is higher-quality because it’s more reliable. Is rib-eye steak more reliable than ground beef?

          • hit

            Maybe because it isn’t lower quality. We can say a newer car is higher-quality because it’s more reliable. Is rib-eye steak more reliable than ground beef?

            Quality, like value, is subjective, and reflects an individual judgment that varies from person to person.

            We know that people generally prefer ribeye steak to ground beef because the price is higher. The study of these preferences and their interrelationships is called “economics”.

      • 3. The transfer payments to those pretending to be “not working” are roughly proportional to the incomes of those who “are working”, so, no, AHETPI doesn’t apply only to those who “are working”.

    • The eggs rose because of environmentalist and animal rights pressure. They forced egg producers to only have 2/3rd the chickens in the same space. When this started in the Midwest where I lived eggs went from 80¢ a dozen to $1.29 a dozen in six months and the to about a buck fiddy.

      I am sure that got washed somehow in seasonal adjustments and substituting quail eggs for chicken eggs and whatnot.

      • Eggcellent point, Marque. I’ve been wanting to point that out myself, but just didn’t get around to it. I would add, though, that much of the increase in battery chicken space seems to have been “voluntary” on the part of the industry. Maybe this was in anticipation of legislation, or was an attempt to pacify the critics. Either way, the big established producers, as always, should welcome more-restrictive regulation, as it acts as a barrier-to-entry against potential small-scale competitors.

  9. Thanks to the ubiquitous HFCS, composite food prices run with wages. Take out that poison and quality foods clearly out pace wages.

    • Charlie

      Take out that poison [HFCS] and quality foods clearly out pace wages.

      Take out those poisonous tariffs on imported cane sugar, and HCFS will disappear.

  10. I’m with Mark Perry on this one. The last thing folks in the US have to worry about is “food inflation,” for so many reasons.

    Health insurance, mortgages, and property taxes are much, much more problematic.

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