Grocery Prices and Wages, in the Short Run and the Long Run

From the recent CPI inflation report, one of the biggest challenges for most households is the continuing increase in the price of food, especially “food at home” or what we usually call groceries. Prices of Groceries are up 13.5% in the past 12 months, an eye-popping number that we haven’t seen since briefly in 1979 was only clearly worse in 1973-74. Grocery prices are now over 20% greater than at the beginning of the pandemic in 2020. Any relief consumers feel at the pump from lower gas prices is being offset in other areas, notably grocery inflation.

The very steep recent increase in grocery prices is especially challenging for consumers because, not only are they basic necessities, if we look over the past 10 years we clearly see that consumer had gotten used to stable grocery prices.

The chart above shows the CPI component for groceries. Notice that from January 2015 to January 2020, there was no increase in grocery prices on average. Even going back to January 2012, the increase over the following 8 years was minimal. Keep in mind these nominal prices. I haven’t made any adjustment for wages or income! (If you know me, you know that’s coming next.) Almost a decade of flat grocery prices, and then boom!, double digit inflation.

But what if we compare grocery prices to wages? That trend becomes even more stark. I use the average wage for non-supervisory workers, as well as an annual grocery cost from the Consumer Expenditure Survey (for the middle quintile of income), to estimate how many hours a typical worker would need to work to purchase a family’s annual groceries. (I’ve truncated the y-axis to show more detail, not to trick you: it doesn’t start at zero.)

As we can see in the chart, while there was a lot of movement, from the mid-1960s to the mid-1990s there wasn’t a clear trend in either direction. Relative to wages, groceries weren’t any cheaper in 1995 than they were in 1965. Wages rose, but food prices rose at roughly the same rate of this 30-year period. Then, there was a big decline from the mid-1990s to the early 2000s. And then another big decline after 2015, which you might have expected given the first I showed you. Wages rose from 2015 to 2020, while grocery prices were flat.

Cumulatively from the beginning of 1995 to the beginning of 2020, the real price (in terms of hours worked) of groceries fell by about 20%. In other words, it took almost 50 fewer hours of work for the average worker to put food on the table. That’s a nice improvement! We all know what’s coming next, though: since then, we’ve lost some ground, and it now takes about 10 more hours of work to purchase a year’s worth of groceries. To be sure, wages have risen, but not nearly as much as grocery prices.

The optimistic long-run perspective is that relative to wages, we’re still near an all-time low for grocery prices. But that’s not how consumers and voters tend to think about the issue. They want to know if things have improved in the past year or two. And while none of us would probably want to return to the world of September 2020, consumer are clearly suffering from the higher grocery prices. The big question on everyone’s mind going forward is whether we’ll give back all of those gains since 1995 with continually rising grocery prices.

Of course, I will make no attempt to predict the future. But there is some potential for relief if we look at global food prices. Here’s a chart of the IMF’s measure of global food prices for the past decade, which measures the price of food commodities. You’ll notice one thing immediately: they were roughly flat from 2015 to 2020, just like grocery prices in the US! It seems like these two things are connected, which shouldn’t surprise us.

If we focus on the period since 2020, we can clearly see a big culprit for rising grocery prices: from the bottom in April 2020 to the peak in April 2022, prices were up a whopping 74%. And even we just look at the one year from April 2021 to April 2022, there was a rise of 24%. All of these global food prices are not starting to show up on the shelf at the grocery store.

The silver lining in the IMF data? Since the peak in April 2022, global food prices have declined sharply. And that data is only current through July 2022. We’re likely to see further declines in the months that follow. It will take time for these prices to work their way through to consumer prices — remember, these are commodity prices. Much like the Federal Reserve actions taken in the past few months, we’ll benefit from these lower commodity prices in the long run. But probably not this month or maybe even not in 2022.

One thought on “Grocery Prices and Wages, in the Short Run and the Long Run

  1. Gale Pooley September 14, 2022 / 1:31 pm

    Another great analysis.

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s