Mark Perry: Food Prices Have not Risen Much
By David Henderson
Annual increases in food prices over the last four years have averaged less than 2%, which is the lowest average food inflation rate over a 48-month period in almost 50 years. Although it might seem like food prices have been rising faster recently than in the past due to either temporary increases in the prices of certain foods or because of short periods of price volatility, the average increase in food prices of less than 2% over the last four years is the lowest in several generations.
This is an excerpt from Mark Perry, “Americans love to complain about rising food prices; here are three reasons they should stop whining,” Carpe Diem, September 14, 2013. The whole thing is excellent.
In the comments, someone writes:
About three years ago, food was going up pretty significantly. I know they use substitution now if Filet Minion goes up, it isn’t inflation cuz folks will just start eating chub hamburger instead – so it was going up much faster than the government actually states – since the difference in quality of the substitution is not accounted for.
Fortunately, another commenter points out in response what the Bureau of Labor Statistics says about this. Here’s the relevant excerpt from the BLS:
When the cost of food rises, does the CPI assume that consumers switch to less desired foods, such as substituting hamburger for steak?
No. In January 1999, the BLS began using a geometric mean formula in the CPI that reflects the fact that consumers shift their purchases toward products that have fallen in relative price. Some critics charge that by reflecting consumer substitution the BLS is subtracting from the CPI a certain amount of inflation that consumers can “live with” by reducing their standard of living. This is incorrect: the CPI’s objective is to calculate the change in the amount consumers need to spend to maintain a constant level of satisfaction.
Specifically, in constructing the “headline” CPI-U and CPI-W, the BLS is not assuming that consumers substitute hamburgers for steak. Substitution is only assumed to occur within basic CPI index categories, such as among types of ground beef in Chicago. Hamburger and steak are in different CPI item categories, so no substitution between them is built into the CPI-U or CPI-W.
Furthermore, the CPI doesn’t implicitly assume that consumers always substitute toward the less desirable good. Within the beef steaks item category, for example, the assumption is that consumers on average would move up from flank steak to filet mignon if the price of flank steak rose by a greater amount (or fell by less) than filet mignon prices. If both types of beef steak rose in price by the same amount, the geometric mean would assume no substitution.