Angela's Sunday Special

The Sunday special at Angela's Pizza and restaurant was meatballs and spaghetti for $4.99.  Isn't that amazing.  Granted, dinner at Angela's is not fine dining-- it's just a local place mostly doing take out of decent food.  Still, that special a year ago was $6.99.  Where's all the inflation everyone is worried about?

Take a gander at this graph from Casey Research showing commodity price inflation.

The chart title is misleading-- what's shown is commodity price increases, not retail price increases.  The price of wheat has gone up 74%, not the price of a loaf of bread.  Sobering stuff all the same.

This article reports that Richard Berner at Morgan Stanley believes that, in America, commodity price inflation will not translate into food price inflation at the grocery cash register.  He predicts the direct impact of increases in food prices on overall inflation will amount to just 0.2-0.3%.  Mr Berner says Americans are a special case because:

* we eat more processed foods than the rest of the world
* rising grain prices causes herds to be slaughtered lowering the cost of meat
* sellers absorb the price increases
* consumers will substitute cheaper foods when prices rise

Mr Berner may be right, but I take issue with the last two reasons cited.  First, if Angela is serving spaghetti and meatballs for $4.99 she must be close to her limit on absorbing price increases.  You do what you have to do to stay afloat in a bad economy, but if Angela loses money by absorbing price increases for an extended period, she's out of business.  Second, if Americans eat a less expensive diet to keep their food budget static, what does this have to do with food price inflation?  Can we keep the price of steak at $7 a pound by eating beans at $1 a pound.  I suspect not forever. 

Prices have been falling for assets that depend on credit creation such as housing.  On the other hand, many everyday purchases such as food and gasoline are rising in price.  According to this website, in 2009 the average American consumer's expenditures for food, transportation, and housing were 13%, 16%, and 34% respectively.  It will be interesting to see how these percentages change in the coming years.