What You Need To Know

Most Americans realize that inflation in the U.S. recently spiked to its highest level since the early 1980s. Moreover, what we pay for food is an important part of total inflation. According to the Bureau of Labor Statistics, food prices account for 13.5% of the relative importance of the total index. We see the high cost of food every time we go to the grocery store. Higher food prices have a harmful effect on those with lower incomes and retirees on a fixed income.

What is inflation? How has food inflation compared to overall inflation? How much has the cost of milk, bacon, and other staples of the American diet risen over the years? Where do we go from here? Will we reach the Feds 2.0% inflation target? We’ll look at these and other important questions below.

What is Inflation?

Inflation happens when the demand for goods and services is greater than the supply. Additionally, inflation on imported items occurs when the dollar weakens or when the U.S. government increases tariffs on imports. These conditions lead to higher prices, which eventually causes consumers to spend less and switch to a generic equivalent in lieu of a name brand.

The rate of inflation is measured by the consumer price index (CPI), which is comprised of a basket of goods and services used to track price changes for consumers. This basket includes prices on housing, apparel, transportation, food and beverages, medical care, recreation, and other goods and services.

Food Inflation Versus Total Inflation

Since 1950, the CPI has averaged 3.54% per year while food inflation was 3.36% annually. Not much difference. The story is similar when measured from 1980 to the present. CPI averaged 3.34% compared to food inflation at 3.05%. In both cases, we find food inflation was slightly less than total inflation.

The following graph contains the annual inflation rate for total inflation (CPI) as well as food inflation from 1980 through 2023. Most of the time total inflation and food inflation were similar. However, during the early 1980s, as total inflation was falling (red column), food inflation (blue column) remained well below. Conversely, during the 1970s (not shown on graph), stagflation was rampant as consumer prices rose and the economy struggled. During the recession of 1973-75, food inflation was as much as 10.2% greater than total inflation. You will also notice how the most recent round of inflation of the past two years saw food prices rise much faster than total inflation.

The next graph provides an overview of specific foods. Even when you compare specific food items, we find that food inflation has not been terribly high during these periods. For example, a gallon of milk was about $0.83 per gallon in 1950 compared to $3.96 in 2023. That equates to an increase of 2.16% per year. Using 1980 as a starting point, the price of milk rose by 2.82% per year through 2023. Of the five items listed in the graph, bananas had the smallest increase while bacon and white bread had the largest price increases.

Where Do We Go From Here: Inflation and The Feds 2.0% Target
TGT

Where do we go from here? Will we reach the Feds 2.0% target for inflation? As I’ve mentioned in previous articles, the Fed is fighting the federal government in its attempt to bring inflation down. While the Fed is raising interest rates to slow the economy and reduce inflation, the federal government is spending excessively, which stimulates the economy. Hence, these actions are at odds with each other, which makes the Feds job much more difficult.

I wouldn’t expect this to change anytime soon since it’s an election year and politicians are spending enormous amounts of money to win votes. Thus, the federal government’s actions (fiscal policy) are working against the Feds actions (monetary policy). This will make it extremely difficult, perhaps impossible, for the Fed, by itself, to get inflation down to its 2.0% target.