2008 February 26 Tuesday
Oil And Food Costs Grow In Personal Budgets

Watch changes in the percentage that energy and food costs take in household budgets.

Still, things are not quite as bad as during the 1970s and 1980s oil shocks. In the early 1980s, at the height of the last energy crisis, energy accounted for more than 8 percent of household spending. As prices fell and the economy became less energy intensive, energy costs fell under 4 percent of household spending in the early 1990s.

With the run-up in prices in recent years, economists say energy's share of disposable income is slowly creeping up again. Last December, that figure reached 6.1 percent, the highest level since 1985. The increase of two percentage points amounting to $200 billion is a huge sum, a little less than half what Americans spend each year on new cars and automobile parts.

Energy costs would only need to rise another third to get us back to where we were in the early 1980s. Since electric prices will rise slower than oil prices we'd probably need to hit over $150 per barrel for energy to take as large a percentage of budgets as it used to almost 30 years ago.

Meanwhile grain prices are shooting up.

On Monday, the price of March spring wheat on the Minneapolis Grain Exchange shot up to $24 a bushel, the highest price ever. Within the past month, the price of some types of wheat has risen over 90 percent.


Overall, in January, consumer food prices were up 4.9 percent in comparison with January 2007. Cereal and baked goods rose 5.5 percent. Some items went up even more: Dairy products increased 12.8 percent and fruits and vegetables 6.1 percent.


Yet despite the recent rise in food prices, over a longer period of time, spending on food as a percentage of household income has been declining, points out Michael Rizzo, senior economist at the American Institute for Economic Research (AIER) in Great Barrington, Mass. For example, in 1970, food represented 19.3 percent of household expenditures. By 2006, it had shrunk to 12.6 percent.

I'd like to know what percentage food now takes in American household expenditures. Surely the percentage is higher than it was in 2006.

Remember when doctrinaire free traders told us not to worry about the enormous US trade deficit? Now that this trade deficit has driven down the value of the dollar foreigners can more cheaply buy US wheat. As a result we pay more for food.

Because of the weak dollar and poor harvests abroad, exports of US wheat are up 30 percent this year.

I wonder how far this is going to go.

Hope for a good wheat growing season this spring.

Wheat prices have surged 34 percent since the start of year, pushed higher by growing world demand, tight supplies and bad weather that has pummeled crops in Canada, Argentina and India. U.S. exporters are selling wheat a record pace to meet demand, rapidly depleting stockpiles

I think the US Federal Reserve has put avoiding a financial institution melt down ahead of controlling inflation. At the same time, world economic forces have turned very inflationary. China's growing buying power is going to drive commodities prices upward. Recessions will have to cut down on demand far enough to squeeze out the inflation.

Share |      By Randall Parker at 2008 February 26 10:22 PM  Economics Family

Kenelm Digby said at February 27, 2008 4:27 AM:

David Ricardo's theory hinges upon the notion of 'comparative advantage' and specialization.If the uSA, for example, imports a surfeit of Chinese lap-top computers (which it cannot produce cheaply) and pays for them by selling grain, then the overall effect is beneficial to both parties, more beneficial to your average US consumer than if America kept all its grain and made its own computers, or conversly if the Chinese kept all the own cheap computers.
The fact that Americans are being hit by higher commodity prices is a *symptom* not the cause of underlying cost/benefit advantages, which economic rationalization dictates.

Wold-Dog said at February 27, 2008 12:55 PM:

In this context, it is impossible for the Fed or the U.S. Government to simultaneously alleviate the suffering of the masses, and at the same time, to use a recession to cool the prices of raw materials and food.

The rapid growth in poor but highly populated Asian countries will inevitably lead to a Malthusian situation, causing enormous pressures.

Bob Badour said at February 27, 2008 2:50 PM:


The expected result of expanded free trade is a deflation in prices relative to income. Ricardo does not anticipate decades of enormous trade deficits and massive central bank price manipulations. Neither does Ricardo anticipate a migration of capital as has happened over the past decade or two as more and more companies close factories in North America to move production to Asia.

Kenelm Digby said at February 28, 2008 3:25 AM:

In a totally unregulated free-market (as the 'succesful' neo-con orthodoxy that has won the day has almost instituted), the only thing that matters is who actually has the cash.If the chinese, for example, amass a cash mountain by succesfully producing cheap goods the World clamors for - and use that cash to purchas American grain openly and fairly then this is all to the good and very rational way of allocating resources, which in theory, the 'average' man gains.
The fact that low-income Americans might starve due to these circumstances is of no consequence whatsoiever to a free-marketer.This musrt always be born in mind when you here people extolling the virtues of the 'free-market'.

averros said at March 1, 2008 9:05 PM:

Kenelm Digby --

first of all, neo-cons are not free marketers. They are former Trotskystes, and their ideological ancestry is ultra-leftist. They use free market rhetoric, but all their actions are directed towards more interventionism and government controls. Nowadays it's a secret only for those who live in a cave... even the Washington Pravda^H^H^H^H^H^H Post wrote about it.

Secondly, your kind of economic reasoning is known as mercantilism (look it up). It was throroughly debunked more than a hundres years ago - and its earlier practical results were totally disastrous to French and Spanish monarchies.

Finally, the claim that proponents of free market do not care about low-income people is a collectivist strawman. Improved economy increases incomes and creates more job opportunities for all people - and that means improved life for low-income people, too. It was free market capitalism of 19th century which made America a superpower; it was the total collapse of government's ability to fuck up economy which took Russia from near starvation in 1991 to a relatively prosperous country only ten years later (sure, it created a handful of billionaries, but also vastly improved lives of ordinary people).

In fact, free market generates _optimal_ satisfaction of subjective utilities for _all_ participants given physical and mental feasibility constraints. This is not a qualified statement, this is a proven theorem (Pareto-optimality of free market). Any limiting of the free-market transactions (i.e. regulation), enforced transfer of property from some people to other (i.e. theft and taxation), or destruction of property (i.e. warfare and other crime) _always_ leads to worse outcomes - you simply cannot do better than optimal.

If history teaches us anything, it is that collectivism leads to massive economic collapses and total wars. But, then, they do not teach history nowadays... just carefully edited version of it, omitting juicy parts. And some of these juicy parts are truly revealing, like that story with Roosevelt's letter knife made from the thighbone of a Japanese soldier.

Kenelm Digby said at March 3, 2008 3:39 AM:

You don't know what you are talking about and your profound ignorance and rantng is embarrassing to read on what is normally a 'high-end' forum.
It is a well known fact that the USA's great period of industrial expansion in the 19th century coincinded with the strictest sysyem of tariffs and import barriers on manufactured goods.
Similiarly, during the great 'Irish Potato Famine' of the 1840s that decimated ireland's population, 'free trade' which was the colonial power's (England) official policy lead to the horrific sight of food actually being exported out of ireland whilst Irish peasants who had very little free cash starved to death.
This event lead to a burning hatred amongst Irishmen for all things English that persists to this day.

Kenelm Digby said at March 3, 2008 3:47 AM:

Furthermore,the only thing that has increased russian living standards and 'masked' the near basket-case state of that nation is the quadrapuling of the oil prce - this of course has absolutely nothing to do whatsoever with the 'talents' of the Russian people (it's solely down to the the success and racial characteristics of the *dirigiste* Chinese economy).If you strip out the contribution of minerals and natural resources, Russia has proved itself extremely inept at exporting anything of value to the rest of the world - despite 20 years of shitty Gorbachevism and Yeltsinism - it has the industrial profile of a black African nation.
Oh, the miliary equipment and nuclear plants - the legacy of communism, my dear, and the tangible result of a million broken bodies.

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