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Thursday, May 24, 2007

It's All About Gas And Food

An interesting Reuters article:
Weller and others warn that sharp up-and-down movements may have more spillover into the rest of the economy, because households have a hard time quickly adjusting their budgets.

There was a hint of this in April when U.S. retail sales slipped 0.2 percent as consumers cut back on other expenditures to compensate for higher gasoline costs, which have spiked 32 percent in inflation-adjusted terms since December.

Consumers reduced spending for clothing, sporting goods, general merchandise and restaurants.
Low-income families take the biggest hit from rising pump prices since gasoline expenditures at current price levels account for about 9 percent of their income, Weller said.

Among middle-income families, gasoline expenditures eat up roughly 5 percent to 6 percent of income.
Even assuming that MEW-funded spending drops effectively only about 2% over the course of the next year, you are looking at a net drop in spending of about 3% on consumer goods other than gas if these figures are correct. This wouldn't necessarily be a problem if food prices weren't galloping up in tandem, but then that's the problem. Food prices for lower-income families are up about 10% in most areas since January. Look at wholesale prices for beef. The current is shown, and you can download older averages from the right sidebar. Look at the 5/18 prices compared to say, the beginning of February. The compression factor is in - prices for the very top cuts and the bottom three quintiles are rising, whereas the prices for the 2nd most expensive quintile are dropping. Of course that is not what the consumer sees at the store, because the store balances the overall profit by raising the lower end prices the most.

CPI YoY food briefing updated 5/22 (containing April figures):
Beef up 4.7%
Poultry up 4.6%
Pork up .7%
Eggs up 18.6%
Fresh vegetables up 8.1%
Cereals up 4.5%
Food at home - 3.9%
Food away from home - 3.4%
I compile a "what can we get in the way of meat for our money this week" index, which is running up over 16% YoY as of May. That would be a bottom-end index which actually describes an astonishing number of families. I believe it is right because eggs tend to be the cheapest form of protein and are a fallback. I've got cereals up 12% and bread up 10%. The largest net increases are in the lower end foods. I've also got prices of canned vegetables up approximately 8% YoY. Stuff like macaroni and cheese up are up more than 10%. So I'm shifting my food price index from ~7.8 to ~10%.

All of this describes a pattern of price-constrained inflation busting out rather than moderating. For example, food away from home increased .3% in April whereas food at home increased .1%. CPI for lower-income workers is probably badly understated. Rental and housing makes up comparatively less of the household budget for rural households in comparison to urban households, so CPI for those areas is understated. Public transportation is effectively unavailable for most workers outside of the densely populated sections, so the average CPI is distorted there too.

What this should mean is that lower-end credit is going to blow up in everyone's faces and indeed that is beginning. There are some real structrural problems that economists had better start accounting for. One of the nastiest aspects of the current economic situation is that close to 69% of the population are homeowners. Most of the rest of the population falls into the segment that is taking a real beating (approximately 10%) in effective spending power from these types of baseline increases in necessities. That's two trends which reinforce each other and exert a structural drag on consumer spending that cannot be overlooked.

Just my 2 cents worth; I figure that I now work one day out of my pay period to just buy gas for work. (I'm paid twice monthly.) Fortunately, I have chickens ;) Half my monthly check goes for my land payment. I have no utilities other than my XM radio and propane/gas for our trailer. Food prices are really starting to hurt and we do not use processed foods. Just the basics are rising in price. This does not look good. At least I am in a place where I can have livestock, as I may really need it if things get worse.
Teri, people around here are starting to talk about coops. The price of everything is so high now that it may well happen. There's not much else that poorer people can do and this is going to hurt some elderly people very badly.

I'm very concerned. The government needs to wake up and maybe take a look at expanding WIC. They just don't seem to get how many middle class people with houses and children sometimes have $20 or $30 to buy food for the kids.
Thank you for your comments, Teri. We here up north are living in fantasy land.

About the gas prices. I'm not sure where to go with this concept, perhaps you can run with it. The high gas prices being caused by limitations of refining capacity might be a blessing in disguise. It might cause long term fundamental usage changes which can happen due to gradual market forces, versus some inelastic shock to to a high crude price or supply embargo. Follow my thinking, Mama?
CF - the problem is that the part of our population that is really pressured can only adjust in a very limited fashion. Quite a large segment of the population that really is acutely price sensitive to gas changes lacks the financial resources to buy a fuel-efficient car, for example.

Unless we are willing to build nuclear plants and/or open up significant new avenues of supply we have a genuine problem on our hands.

Due to housing costs, it's primarily the wealthier echelon of the population that even has the option to use public transit. The result of this will be to chop out retail and service employment, which will put additional pressure on people.

Btw, when I say $20 or $30 to buy food, I mean per week. You wouldn't believe how many families making between $35,000 and $45,000 can find themselves in this position.
We sold out our place in town (on the Washington side near Portland OR) because I just thought things were going to get worse. The commute is a drag, but I will actually own this place in 8 more years (simple interest too.) If I could pull together enough to boost my food storage, I would have no worries. We've pretty much wiped it out over the winter.

I am fairly familiar with the old commodities program and I really wish they'd bring it back. (I believe that some Indian tribes still get commodities.) Instead of going to the store and buying all sorts of prepared stuff, you got basic commodities; flour, powerdered milk, butter and cheese, canned meat and noodles, etc. They had cook books to tell you how to use your commodities. I don't remember inclusion of fresh veggies and fruit, but if you had the basics, $20 a week would buy those easily. It was a much better system.
I do remember that. That's good nutritional food. Unfortunately, stockpiles of even powdered milk are pretty much gone, not just in the US but in Europe. Wheat and corn stocks are running low also.

As for things getting worse in that area, I believe you're right. this site gives listing prices for each area each week. Listing prices lag the actual market a bit, but they are a better key to the market over time than selling prices when severe downturns happen. The Portland entry shows inventory up and a small decrease in YoY median home listing prices. The peak seems to have come last year in the Portland area. Prices there were very, very out of sync with median incomes, so sooner or later the market was doomed to decline.
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