Inflation makes everything more expensive, right?
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If 2022 had a word, it would probably be inflation. So far, as of August 2022, inflation for the 12 months prior sat at 8.3% in the United States. That is significantly higher than the typical 1-2% inflation we see on average. In this article, I'm not going to explore the causes of inflation, but I do want to dig into the data behind inflation to get some perspective about where our money is going.
Inflation is a general concept where prices rise. Economists measure this rise in prices through CPI. CPI stands for Consumer Price Index. The fine folks over at the Bureau of Labor and Statistics track prices for things households commonly purchase (food, fuel, education, clothes, etc), then calculate the monthly index. The tricky part is in the interpretation of this number.
First, there are a two different CPI numbers you might hear reported. Headline CPI is the overall number with all tracked products included. Core CPI excludes food and fuel in its calculation and is considered less volatile since food and fuel prices can swing up or down a lot in a short period.
The second issue when interpreting CPI is that CPI is released monthly but should be understood yearly. Every month when CPI numbers come out, the reported number compares the rise in prices over 12 months. So when inflation is 8.5%, it doesn't mean that products are 8.5% more expensive this month than last month, but that they are 8.5% more expensive than last year.
These two issues show me that CPI isn't useful for the average non-economist to understand the economy. After all, who remembers how much they paid for things last year? Also, not every family purchases everything in the basket of goods. So the reported number isn't necessarily what you will experience in your budget.
To put things in perspective, I wanted to dig into the most volatile data and the one we see the most, food prices. The Bureau of Labor and Statistics (BLS) publishes average prices for food and fuel products around the United States. I downloaded the data and looked at the past ten years of price trends for food.
Where's the beef?
Let's start with the most expensive food item by weight in our shopping cart, meat. From 2012 to 2022, the price per pound of meat did not increase at a steady pace. Instead, we see big jumps, periods of flat prices, and more jumps. Let's take a look.
What you see is the US city average for five different meat products. These prices are not inflation adjusted and are the raw prices reported. The BLS tracks prices down to the city and regional level, but not all products have data for every area, so the city average was the best to see these prices over time.
The first thing I noticed was the massive spike in mid-2020. This was due to the spread of COVID-19 among employees at meatpacking plants in April 2020, causing those plants to shut down temporarily. Prices did go down but remained higher than before for the rest of 2020.
Throughout 2021 and 2022, prices have steadily increased. Today, chicken breast is notably more expensive than pork chops. This increase has been blamed on avian flu outbreaks, rising feed prices, and rising fuel prices.
In 2014 there was a similar shock in beef and pork prices, but not chicken. The Atlantic blamed strong consumer demand for the price increase. Another explanation from Jayson Lusk, a food and agricultural economist, blames supply issues. He believed farmers might be rebuilding their stocks from previous shocks, causing the prices to go up then.
Let's not ignore the period from 2015 to 2020. Prices stayed flat over this period. Americans enjoyed flat meat prices for five years during a prolonged period of economic growth. You probably didn't see any news stories about that.
As a side note, you can see small seasonal effects in sirloin steak prices. Each summer, the prices go up. The obvious explanation is that people eat more steak in the summer when they fire up the backyard grills.
Ba ba ba, ba banana
Let's move on to something a bit less depressing. When I started this analysis, I believed I would find strong seasonal effects for many food products. I thought that the natural cycles of raising animals and crops would show in the end prices in the store.
Well, I was mostly wrong. Of nearly 100 food products tracked by BLS, I found seasonal effects in only a few. The products that showed seasonal price changes were those grown in fields with a short shelf life. So basically just fruit. Other crops like grains or potatoes can be stored for months, which means the supply from harvests can be spread out over the year.
Tomatoes, oranges, and grapefruits are products with clear seasonal pricing.
In the winter, prices spike, and then they fall again in the summer. Imports can supply Americans with these items all year, but the extra transportation cost clearly impacts the price. I suppose indoor greenhouses can also supply fruit all year, but the extra overhead of buildings and electricity would make these even more expensive.
One thing shocked me about fruit prices. Bananas.
Think back 10 years. How much did bananas cost? How much do bananas cost today? If you answered around 50-60 cents to both questions, you would be right. Take a look at banana prices over the past ten years, along with strawberry and grape prices.
I looked around a lot for an explanation for this. Some argue that bananas don't last long on the shelf, and grocery stores must sell them fast. But this would be true of grapes as well, and we don't see such stagnant pricing for grapes.
Yes, most bananas you buy in the grocery store are imported, and only a few companies control much of the banana production in the world. Yet, as we saw with meat prices above, external factors impact prices with dramatic results. So why don't we see this with bananas? It seems to me that with inflation and rising wages across the globe, banana prices would increase. Yet they stay remarkably consistent.
My explanation (and theory) is that banana prices are a result of price anchoring. Price anchoring is from behavioral finance. It is the irrational bias towards some benchmark number. We see this often with pricing like $99 or $79.99.
When you enter a grocery store, bananas and their prices are usually front and center. The sign for the price of bananas might even be bigger than the prices for other fruits. I believe grocery stores are using the price of bananas as an anchor for consumers, which signals to them the relative affordability of that store. If your grocery store raises banana prices to 75 cents, you can bet customers will notice, and they might change their behavior and visit a competitor.
I don't have data to back this up, but it's my working hypothesis. I would love to hear ideas that support or contradict this.
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Let's now zoom out a bit and put prices into perspective over time. I put several of the products we have seen already into a slope chart to see how the prices have changed from August 2010 to August 2022.
The idea of a slope chart is to compare things at two fixed points in time. By comparing their slopes, we can see the rate of change of those prices between those two times.
My takeaway from this chart is that some things don't change much. Besides bananas, we also see that flour and rice haven't increased in price significantly. Potatoes now cost more per pound than rice.
The other standout takeaway is the price of bacon and beef. The slope of these two prices looks to be very similar. Milk and chicken started nearly the same, but chicken has outpaced milk and is now more than 50 cents more expensive.
A simple model to understand inflation
All of this price data is quite interesting (at least to me). While we get the dimension of time, we are missing another context that will help us understand how this impacts us. Yes, prices are going up, but other things have changed in our lives over that 10 years.
I wanted to make something that would help you understand inflation by bringing it closer to something everyone deals with, a monthly budget. I took both median and top 10% household income data and mashed it up against a set amount of meat that a family might purchase.
By dividing the price of meat by the monthly household income by we get a number that tells us how much that family would spend on that amount of meat as a share of their monthly income. I assumed this fictional family purchases 74 pounds of meat in a month (approximately 33.5 kg).
The result shows us how the price of meat is changing compared to the income of families in the United States. For beef, we see that the trend is going up. This tells us that if a family primarily eats beef, they can expect to have more of their budget dedicated to buying meat each month.
Household incomes are increasing, but prices (at least for beef) are outpacing those increases. Some say that Americans eat more meat today than in 1995. If true, this means Americans' budgets are being squeezed even more by beef prices.
If I were a beef producer, I would work hard to figure out how to lower prices. If I don't, I could expect consumer behavior, and perhaps preferences, to change. This could result in less demand for beef. Or perhaps this is the whole plan, with beef positioned as a luxury meat.
If you aren't a beef person, we can do the same thing with chicken breast.
Here we see a different story. As we saw above, chicken prices have increased quite a bit, but the increases in household income have more than made up for this. Today American families should expect less of their budget to be impacted by chicken prices.
To put beef and chicken side by side we see a changing economic outlook for your meat choices.
I like this model of looking at inflation because it connects to something each of us interacts with, our budgets. Inflation hurts us because we spend more on products, but it doesn't exist in a vacuum. As prices change, so do wages. It is this rate of change and the interplay between them that impacts our lives.
Of course, people don't always buy the same amount of meat. Families will probably choose to buy more or less of certain meats based on their budgets and current prices. But this measure gives us a sense of how a family's budget is squeezed.
I'm unaware of an economic measure that looks at anything like this. I'm not sure it needs a name, but something like the Meat Income Ratio (MIR) seems appropriate. If you like this MIR, let me know, and perhaps I can make it a standalone analysis that is updated yearly.
You can access all the code I used to perform the analysis above. I host it all on Deepnote, a great place to perform analysis and share it with others.
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