As leaders push affordability to the forefront of the national conversation, food and fuel inflation are at the center of debate and discussion across the U.S. This is headline inflation, as opposed to core inflation, which excludes food and energy.
Measured by the Consumer Price Index, headline inflation is used to determine payment adjustments in government programs such as Social Security. Food and energy are considered highly volatile, as evidenced by impacts from military conflicts and extreme weather events.
Rather than talk about food cost based on this week’s grocery store receipt, let’s look at:
- the historic impact of U.S. food prices on families
- how this country compares to others on this measure
- how this impacts our standard of living
First, the percentage of U.S. consumer expenditures devoted to food — excluding dining out, tobacco and alcohol — is about 8%, as reported by the Bureau of Labor Statistics. Contrast that with the world’s second-largest economy, China, where food accounts for 17.2% of household expenditures. Of course, in some countries, particularly developing nations and Russia, the percentage of the family budget dedicated to food purchases often exceeds 30%.
Agriculture’s efficiency dividend
After World War II, U.S. households typically spent 25% to 30% of their budgets on food. As agricultural efficiency increased over the following decades, that share steadily declined, enabling Americans to urbanize, own multiple vehicles, pursue postsecondary education and take vacations — to Disney parks, Las Vegas and Europe. In many ways, this efficiency dividend quietly helped fund the modern American lifestyle.
Here’s how that happens, as explained by German economist Ernst Engel nearly 170 years ago. Engel’s Law states that as income rises, people devote a smaller share of their earnings to subsistence items such as food. All else being equal, the share devoted to food is one of the best measures of the standard of living of a population.
This is important to understand. As the portion of people working in agriculture continues to shrink and urban populations increase, Engel’s Law needs to be reinforced in public policy discussions because the agriculture industry can be taken for granted in public discussion. However, society’s standard of living and its ability to achieve higher levels of personal attainment are ultimately rooted in the agriculture industry.
Watch this warning sign
By paying attention to the amount of money families are spending away from home, we can easily see when that standard starts slipping.
Fast-food businesses are already reporting declines in sales. That could be caused by two things:
- economic stress in lower- and middle-income households
- shift toward higher-protein consumption
We can better pinpoint whether it’s economic stress when we see higher-end dining establishments report declines. Though higher-end establishments for now remain robust, a correction in the stock market or additional job layoffs among upper-income individuals could quickly soften demand in this sector. The beef industry, in particular, needs to be on alert for this warning sign.