I took my daughter to the local Walmart supermarket over the weekend to return a movie and get some school groceries when we passed a display with boxes of the chain's "Great Value" pasta. I couldn't believe the price displayed -- $1.79 for a box of pasta -- and it was being advertised as a special.
I am used to paying about $1 for a box of pasta on sale. Pasta has always been very cheap to buy.
It seems that food, and I mean basic items like a pound of bacon, a package of Swiss cheese, a head of lettuce, and yes, a box of pasta, are continuing to go up in price. Every week, going food shopping is getting more and more expensive. Ask the average American shopping in the supermarket and he or she will tell you that over the last year, there has been a significant rise in prices.
Before last year, while Americans have already cut back significantly in discretionary spending during this Great Recession (Depression), most did not significantly reduce their expenditures in a similar way for basic items at the grocery store. That changed with a substantial increase in energy and food prices early last year.
While most Americans spend about 10% of their family's budget on groceries, about one-third of them actually spend closer to 20%, so large increases in grocery prices means less spending on consumer goods, which account for a great portion of our economic activity. That in turn hurts chances of a near term economic recovery.
If you believe the government, we have no immediate threat of inflation at all and everything appears to be fine. The Department of Labor reported last week that the Consumer Price Index (CPI) increased only 0.2 percent in January, an increase for only the second time in four months. For the last twelve months, the CPI was up 2.9%. The Fed is forecasting a target for inflation at 2% for 2012.
But the CPI, the standard benchmark of inflationary pressures, excludes food and energy prices (a truly dishonest gimmick to keep increases in payments like Social Security, which are indexed to the CPI, at a minimum). Thus, the CPI alone is a false indicator of true inflation situation.
The Department of Labor does keep separate indexes for food prices, but you never hear about them in the context of discussing inflationary pressures. These separate indexes for "food at home" and "food away from home" for the prior 12 month period were up 4.4% and 5.3% respectively.
The new spike in gasoline prices which are predicted to surpass $4.00 a gallon by the summer will lead to greater transportation costs for food, and judging on the price of a box of pasta, we are already seeing the beginning of another spike in prices in the supermarket again.
It's going to get worse. The Obama Administration and Congress are setting up for an epic battle in regard to the expiration of a farm bill that provides farmers with massive subsidies for crop insurance and food production. The president wants to cut $23 billion from this program and reform crop insurance -- interestingly enough in line with a similar proposal by Rep. Paul Ryan of Wisconsin last year.
Republicans, particularly from the farm belt, are looking instead to save money in this area by making huge cuts in food stamp and nutrition outlays, which are used to preserve farm programs.
Either way, such cuts could eventually translate into even higher costs at the supermarket to allow farmers to cover expenses once now paid for by government agricultural supports.
In terms of delivering food to its citizens, the US government has done a good job in maintaining constancy in availability and cost management through its agricultural policies. The abundance and variety of staples in the US food supply and the relative stability in pricing at the supermarket has been an unappreciated given for generations.
An extension of the farm bill is likely this election year, but this time two years from now, the price of gasoline combined with serious government cutbacks to agriculture could result in much higher prices, a decrease in food production, and even shortages at the grocery stores.
It would be nice if there were changes in the CPI index to give Americans an honest number in regard to inflation, particularly at a time when increased energy costs and changes in the way we pay our farmers are going to greatly influence prices at the grocery store.
Instead, keep monitoring the price of that box of pasta, not the CPI, if you want a true indication of how inflation and food costs impact the American economy and lifestyle.
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