Food and energy prices are spiking and are likely to remain high assuming extended sanctions on Russia. What might that mean for inflation and spending on other items? Fuel spending as a percent of total is relatively small (2.5% as of 4Q21) and has been trending down over the last decade. This measure would certainly differ by income level. The decline in fuel spending is mainly due to incomes growing faster than fuel prices, as well as, more energy efficient vehicles. Rising fuel prices will impinge on consumers’ budgets, but is a relatively small portion of those budgets. Additionally it is important to consider the economic offset of energy production here in the U.S., which benefits from higher prices.
Food takes up a larger portion of consumers’ budgets, almost 8% as of 4Q21, and this only counts food-at-home spending. Still, this number greatly overstates the value of the agricultural input to this spending. Recently economist Ian Shepherdson shared a surprising perspective on how little grains contribute to food prices. At the time of his analysis, a 14oz box of Wheat Chex sold for $4.59. Wheat makes up 90% of the food content, but just 3.9% of the purchase price (just 18 cents). What? Most of the price is production, packaging, distribution, marketing, and profits collected from the manufacturer, distributer, wholesaler, and retailer. Therefore, if wheat prices were to double, the price of the Wheat Chex would rise by less than 4% (all else being equal). Alternatively, consider corn. For a 12oz bag of frozen corn purchased at $1.99, the cost of the corn is only about 10 cents. If corn were to double in price, it would raise the price of the bag of corn by just 5% (all being else equal).
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