The Squeeze is On
Here’s one definition of the middle-class squeeze: it’s the gap between middle-income families’ economic aspirations and their means. And one way that gap expands is when just paying for basic necessities uses up too much of the old paycheck. Obviously, energy prices have been a widely appreciated part of this story. But the recent increase in food prices deserves equal time in any discussion about the squeeze.
The figure below shows two countervailing trends (click on image to enlarge):
The annual changes in food prices and nominal weekly earnings (i.e., weekly earnings before accounting for inflation; these are the earnings of the 80% of the workforce that are non-managers in services and blue-collar workers in factories).
For all of 2006 and part of ’07, weekly earnings growth surpassed that of food prices. But beginning last summer, the slowing economy began to whack away at wage growth, while pressures on both the supply of and demand for food pushed prices higher than they’ve been since the early 1990s.
In other words, for many working families right now, feeding your family and filling your tank is exhausting your paycheck. And that’s gotta hurt.
Comments (18)
I wonder what I'm missing, since the text jumps after the image. I was only able to get here to comment by going through your bio page.
Light a fire under Andrew and Josh and get this crap cleared up.
March 11, 2008 6:13 PM | Reply | Permalink
Ah, I finally saw the missing text, blending into the other stuff since it is found left of the embedded image. It formats OK in Firefox, but not IE.
March 11, 2008 6:16 PM | Reply | Permalink
Interesting.
In Firefox the graphic below the chart is blocked; I get the word ADVERTISEMENT. And I get the link to below the fold.
I tried disabling "Adblock Plus" and "Flashblock," but I still can't get the graphic to appear in Firefox.
Anyone know why?
March 11, 2008 8:07 PM | Reply | Permalink
Fuel prices up? Food prices up? Time to increase ethanol subsidies!
March 11, 2008 8:12 PM | Reply | Permalink
With food there are any number of ways to cut back on expenses, and certainly without compromising nutrition or going hungry. If people just ate less meat (say two or three meatless days a week) they would save conisderably.
March 11, 2008 9:54 PM | Reply | Permalink
Re ethanal subsidies, I read today that about a third of our corn production is now set aside for ethanol--much more than I thought, and obviously a significant part of the price run-up.
Re shifting away from more expensive stuff like meat, that will certainly happen--probably is happening already (I myself had baked ziti tonight--no meat and totally delicious). But other prices are rising too--in some parts of the country, a gallon of milk and a gallon of gas are converging on $4.
Another dimension here is that it's the rising demand for meat (and shift away from cheaper veggies/grains) in developing countries, like China, that is also boosting prices. (And probably their cholesterol too!)
March 11, 2008 10:16 PM | Reply | Permalink
Now, what you should be reading are the reports of current pricing and availability of grain elevator storage facilities (the Hunt brothers are probably out there cornering the corn and wheat markets as we speak).
March 11, 2008 11:00 PM | Reply | Permalink
Mr. Bernstein,
Thanks for your contribution, but I'm afraid your graph is a bit misleading. I have no basis to challenge the validity of your data, so let's just suppose that the numbers are correct. What you have shown, however, is that food prices are increasing at a slightly faster rate than "nominal weekly earnings", and your conclusion is that the typical American consumer is getting squeezed under the burden of higher food costs outpacing pay raises. I see it a bit differently, however, because as a percentage of disposable income, food costs in the US are still remarkably low. See: http://www.ers.usda.gov/briefing/cpifoodandexpenditures/Data/table7.htm. The data show that as of 2006, the cost of food as a percentage of disposable income is just under 10%. So what your chart may mean is that in the near term, this percentage may rise slightly, but it will still be incredibly low by historical standards (consider that even as recently as 1980, the percentage was over 13%.) It doesn't seem to me that it is time yet to push the panic button.
March 12, 2008 12:39 AM | Reply | Permalink
I disagree, chem.
You're right about the share of income, which has fallen a ton over the years, but if food prices outpace wages for awhile, that share will surely rise.
One reason the share has fallen is because food prices have stayed so relatively low for so long--long-term avg increase is around 2.5%, I think. We're now up to twice that rate.
I do suspect/hope that will come down, but hard to know when.
I also agree that we're not talking 'panic button' here. Just another dimension of the squeeze.
March 12, 2008 7:37 AM | Reply | Permalink
More on food:
Excerpt from “When filling up the car empties bellies of the poor:”
Global supply is being hit by much of America's grain being diverted to biofuels, following President Bush's decreed shift to ethanol production. This was at least as much to reduce his country's dependence on oil imports from hostile parts of the world as to tackle global warming. American grain stocks are down to their lowest level since it was feeding war-torn Europe in the 1940s.
Europe is also aiming to push for one in 20 litres of transport fuel being crop-based, while Richard Branson is boasting how his aircraft can now fly on friendly fuels. But forests are being cut down to feed biofuel demand, a process described by the UK government's chief scientific adviser as “profoundly stupid.”
Food price pressures are being felt around the world. They have caused riots in Mexico, Morocco, Uzbekistan, Yemen, Guinea, Mauritania and Senegal. A protest in Beirut, where food prices nearly doubled in four months, led to nine deaths. Russia has imposed price controls on staple foods. Pakistan has stationed troops around flour mills. The market price of rice in India has risen by half in a year, and its government recently blocked rice exports except for the premium basmati that finds its way on to British plates.
http://www.theherald.co.uk/features/featuresopinon/display.var.2108652.0.When_filling_up_the_car_empties_bellies_of_the_poor.php
We may need a 21st century Homestead Act--back to the family farm.
March 12, 2008 1:57 AM | Reply | Permalink
Inevitably, it is the "bottom billion" who are hit hardest: people living on one dollar a day or less. When people are that poor, and inflation erodes their meager earnings, they generally do one of two things: They buy less food, or they buy cheaper, less nutritious food. The result is the same -- more hunger and less chance of a healthy future. U.N. Secretary General 3/12/2008
March 12, 2008 3:41 AM | Reply | Permalink
Re: The market price of rice in India has risen by half in a year
How would that be connected to biofuels? As far as I know, no one is making ethanol out of rice (correct me if I am wrong) and the type of land used to cultivate rice is very different from the type of land used to cultivate corn.
March 12, 2008 6:23 AM | Reply | Permalink
JonF311, of course very few commodities act in isolation. Corn (maize) overall demand up (ethanol), supply for food consumption down, prices up. Corn price up, wheat and rice seem comparatively cheap. Ergo, higher demand for rice = higher prices!! Factors in the US can certainly affect markets halfway around the world, and have, frequently; and a richer country can afford price movements more easily than a poor one. Not that there might not be local factors in India, also.
If presumably fairly intelligent people can't their minds around how economies and markets function, I'm not at all surprised that there is no urgency, logic, or understanding concerning global issues, especially anything that seems presently ignorable, like climate change.
March 12, 2008 7:48 AM | Reply | Permalink
Higher wages would be be a big help. It was nice to see the passage of a bill to increase the federal minimum wage, but when the wage hits $7.25/hr in 2009, it will only bring us back to where we were in the early 1980s. The 1968 minimum wage was equivalent to over $9.00/hr today.
See this analysis on my blog:
http://thesvblog.blogspot.com/2008/02/minimum-wage-in-perspective.html
PS Jared Bernstein is always worth listening to. Keep up the good work.
March 12, 2008 2:56 PM | Reply | Permalink
The markets noticed oil hitting $110/bbl today. I'm sure the rest of us will, soon enough.
March 12, 2008 4:40 PM | Reply | Permalink
While the price increases for food may not seem like much, and are historically low, it's important to remember that when food prices were higher, housing costs were very much lower. Until the early 1980s, rent (including energy utilities) were supposed to be no more than 25% of income. As housing prices rose, the standard was changed, so that rent or mortgage payment should take no more than 30% of income. (Please note that utilities are no longer included in the 30%.) Add to that the burden of energy costs when both parents must drive (in separate cars) to work and some household budgets are going to be stretched mighty thin.
March 12, 2008 4:50 PM | Reply | Permalink
Re: If presumably fairly intelligent people can't their minds around how economies and markets function
One of the hallmarks of intelligence is a proper skepticism toward novel and unsuported claims, notably those relying on the post hoc propter hoc fallacy.
Someone claimed the price of rice has gone up in India because of the use of corn in ethanol. I was and remain skeptical about that. Rice is not used for ethanol and the land where rice is cultivated is not generally usable for corn growing instead.
Moreover I don't think rice generally substitutes for corn as a food, any more than leather substitutes for cotton as a fabric. Though both are grains they function very differently as foodstuffs. Most corn is used as animal feed; I have not heard of rice being used for this instead. Nor is there a rice syrup we can use in place of corn syrup as a sweetener. Nor are there are rice tortillas, and while rice meal and rice bread may exist I have never heard of them.
The more likely causes of rice's increase in price are A) the increase in the price of oil, driving of the costs of mechanized agriculture, fertilizer and insecticide and B) in India, the fact that the growing middle class is driving up the price of everything.
March 12, 2008 7:32 PM | Reply | Permalink
More on rice:
“The rising demand for rice can in a way be attributed to African countries, which are moving away from coarse cereals such as corn, according to Mr Suresh Babu, Senior Research Fellow of the US-based International Food Policy Research Institute (IFPRI).”
http://www.thehindubusinessline.com/2008/03/13/stories/2008031350391500.htm
March 13, 2008 12:33 AM | Reply | Permalink