Commodity Inflation And Spare Capacity: Food For Thought

Tyler Durden's picture

The '-flations' are as much part of the commonplace parlance for every sell-side strategist, talking-head, and gold-bug as dividend-stock, quality balance sheet, and long-time-horizon is for long-only managers. Whether deflation, stagflation, inflation, disinflation, or reflation, they all have their moments of sublime glory. Bank of America's Economics team have found some extremely timely 'inflation' signs in the food industry, where it is becoming, somewhat incredibly in this age of supposed frugality and deleveraging, cheaper to eat-out than to cook-at-home. This price disequilibrium has seen consumers respond accordingly; spending on food away from home has picked up while spending on food at home has slowed and also very notably households spending the marginal unit of 'time' working as opposed to 'eating' as economic frailties continue.


BAML- US Macro Watch: Food for thought


When it becomes frugal to eat out


One of the most basic tenets in economics is the law of demand; consumers will buy more of a good when its price decreases and less when its price increases. This is becoming increasingly evident in the food industry. It is becoming cheaper, on a relative basis, for consumers to dine out than to buy their own groceries and cook at home. Consumers have responded accordingly; spending on food away from home has picked up while spending on food at home has slowed.




Prices at the grocer rising faster than restaurants


Chart 1 tells a compelling tale. According to the Bureau of Labor Statistics (BLS), prices for food at home (grocers) are advancing over 6% per year. That is roughly two-and-a-half times faster than prices for food away from home (restaurants). While this data may not line-up with what you hear from the industry, our point here is more on direction of the series. Notice that food at home is more volatile than price movements in the food away from home category. Why the divergence? Grocers tend to be more sensitive to raw commodity prices. Recall the underlying premise of our inflation forecast: spare capacity, particularly in the labor market, will constrain inflation.


Restaurants offset commodity pressures through wages


Restaurants tend to have a stronger labor component in the end-cost of goods sold than grocers. With the youth unemployment rate at 24%, restaurants are better positioned to offset higher food prices by paying workers less. Moreover, for many workers in the restaurant industry customer tips comprise a major portion of earnings. For the average grocer, end consumer costs tend to be more sensitive to raw food prices. Workers in grocery stores are also more likely to be unionized, limiting the ability of grocers to offset higher food prices through wages.





Opportunity cost to go to the grocer is rising


One additional point to consider is the opportunity cost to households. In this weak economic environment, if afforded an extra hour of time, a household will be more likely to work in that hour than spend that time going to the grocery store and preparing food. Again, this implies a relative shift, substituting away from grocery stores into restaurants.


Spending up at restaurants, down at grocers


With prices at restaurants rising more slowly than grocers, consumers have responded in-kind. Chart 2 illustrates this relative consumption shift. The result is predictable but telling. As a share of total personal consumption expenditures, spending at restaurants has been rising steadily since mid-2009. For grocers, on the other hand, this share has been essentially flat.


We can only hope that the S.N.A.P. (food stamp program) will be accepted at Masa, Jean Georges, and Daniel very soon. Though with all the extra marginal hours we will be spending working, perhaps the marginal utility of food (or true consumption) will drop to zero?

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trav7777's picture

'flation, bitchez

Yamaha's picture

This is another bullshit report from the most mismanaged bank in the USA. This might have some truth in NYC - but for a fraction of dining out I can prepared steaks, seafoods, pasta at a fraction of the cost of dining out. I can also buy better quality basics and don't require a 15% tip!

Most people today are to lazy cook and take time for the family. I'm teaching two sons that they can have healthier and better food while dining at home. (and yes - I can afford to eat out anytime)

This is just a poor report unless you weight 400 pounds and eat every meal at McDonalds!

Akrunner907's picture

So very true....and the definition of eating at home includes processed pre-packaged food, which carries a substantial premium over the raw ingredients.  

Yamaha's picture

Also, for those of you that drink adult beverages - why is it that the homeless folks don't buy their drinks at the local taverns? They must be paying too much at the wine/grocery store. I need to walk around the city and show them this report -

"sit your ass down and have a drink - Bank of Americas says it is the cheapest way to go"!

jaffa's picture

Modern restaurants are dedicated to the serving of food, where specific dishes are ordered by guests and are prepared to their request. The modern restaurant originated in eighteenth century France, although precursors can be traced back to Roman times. Thanks.
Houston restaurant

macholatte's picture

and how do food stamps (or whatever the politically correct term is) figure into all this?

Yamaha's picture

The good news is that Americans will be forced into a diet plan soon.......

uno's picture

Fed pays farmers not to plant and gives out SNAP cards (both driving up food prices), and we pay taxes to support this.

Potemkin Village Idiot's picture

how do food stamps (or whatever the politically correct term is) figure into all this?

perfect question to ask because you can use SNAP cards at many fast food establishments (which likely defines the skew)...

Lord Koos's picture

Yep I don't know what universe these guys live in, but around here it's much cheaper to eat well at home... if you're eating at Mickey Dee's everyday, that's a different story. The only decent cheap meal around here is at the Taco joints.  I won't eat American fast food.

Mitch Comestein's picture

Agreed 100%.  This is an apples to big, fat, greasy, cheap-ass burger comparison.

Is the BOA guy driving to fucking Tokyo to shop.

disabledvet's picture

i agree if we're talking New York City. McDonalds, Wendy's and Burger King though? 4 bucks for coffee and a bagel at Dunkin' Donuts while on the go to work. "time is money" as they say. plus if you take the kitchen out of your house that saves money. take the wife out of the house too and that saves even more! i know this much: the problem of obesity in the USA is no accident. we eat out and do not cook in. our idea of socializing is now showing up at the fast food joint and hangin' out as well. normally i'd say "this is far better than socializing in the kitchen" since you're gonna meet your job opportunities at Dunkin' Donuts and not in your kitchen. on the other hand the kitchen's one of my favorite girl friend hang outs so....

BW's picture

Cramer wants everyone to sell stocks, you know what that means.

RebelYell's picture

Did you know that Walmart sells single slug 12 gauge and hollow point 9mm at discount prices? i found that out tonight and topped off my basket. Thanks Sam!

Schmuck Raker's picture

You can't eat 12g slugs. Unless you're sure...

navy62802's picture

But you can definitely kill some big deer with those slugs. The meat from a deer, even a small one, will feed you for quite a while.

RebelYell's picture

Me, I'm preparing for more than deer... walkers.

navy62802's picture

Then the perfect weapon for you, my friend, would be the AA-12 automatic shotgun loaded with 25 rounds of FRAG-12 shotgun grenades. Not much good for hunting, though ... destroys the good meat.

bonderøven-farm ass's picture

Slugs to 'kill deer'?  Hope you plan on spending A LOT of time combing through your damaged meat looking for bone frags......bad idea.

dwdollar's picture

Depends on what you're eating. It's hard to compete with fast food anymore. There's really no reason to make your own burger unless it's top quality beef or something exotic.

alien-IQ's picture

Why would anyone pay money to eat a burger that is NOT top quality beef?

I remember a few years back I read an article about a recall of McDonalds beef. In the statement released by the company, they stated that the reason for the recall was that the beef intended for the burgers contained "an UNACCEPTABLE amount of Animal Feces". The one glaring conclusion I was left with was that they had an "acceptable" amount of animal feces in the burgers they sell.

I have never eaten at a McD's or BK or any such thing again. True story.

tarsubil's picture

Just buy one and look at it. Is it even real beef? Someone set a burger out for like 6 months and it didn't even rot. The stuff isn't even good enough for poop eating bacteria or molds yet Joe Fatso loves it.

Yamaha's picture

Have you looked at the reduced size of food prepared when eating out? Much less food and increasingly poor quality. Tonight I bought 9 large pork chops 2" thick for $18.00. One at a good steak house will cost that much and is 1" thick.

Over the past 5 year my shopping choices have increased 10X and food bills are up over the last 2 years, but not like eating out. This is simple math.

Dasa Slooofoot's picture

A Big Mac meal around me is 7$.  That plus fries and a cook are a lot more expensive than buying your own 

hamburger, fries and coke.   I can get a pound of hamburger for 6$.   No meal worms and newspaper clippings involved. :)

Peterpaul's picture

I don't know what the hell they are pricing. As nasty as foodstuffs have gotten in the last five years, I can still feed my family of 4 a whole chicken, rice (or muffins), and a couple of vegetables for about $8.00 and still have plenty of left overs. In what restaurant can I do that?

If anything, the rise in the spending at restaurants is more fools running in to the dollar menus for lunch...of which it is still cheaper to eat leftovers from home if you know how to plan. I can eat a sandwhich and a couple of pieces of fruit for under $2.00.

Schmuck Raker's picture

Agreed. Someone let Tyler's intern loose again.

Chart 1 doesn't show prices, only changes in pricing.

LowProfile's picture

Cost per calorie breakdown would be more useful (but likely not for the writer's conclusion).

Yamaha's picture

Not true - fat = many calories. Fast (cheap) food wins every time!

ucsbcanuck's picture

Define 'restaurant'. Is McDs a restaurant? 

When I cook at home I can control many things that I can't control at a restaurant. So yeah, it may be cheaper today to eat at a restaurant, but when I add up my healthcare costs in the future, lost time due to illness etc, it may be better in the long run to eat at home.

Mike in GA's picture

Hmmm...At a Waffle house recently, I ordered 2 eggs, 3 slices bacon and one waffle - water to drink - and the bill came to $8.72.  With tip $10.00.

For the $10.00, I can buy 1 doz eggs, 1 loaf of bread and a pound of bacon - breakfast for a week. 

I must therefore respectfully disagree with the above article's conclusion.  Nice charts though.


navy62802's picture

Beefy 5-Layer Burrito (550 calories) = $0.89

navy62802's picture

It's calories. Cost per calorie is what I'm comparing here, certainly not health benefits or taste. Go look up how much 550 calories of soup or celery or rice or broccoli costs at the grocery store. It's ALOT more than $0.89. 550 calories of pretty much anything at the grocery store is many multiples of $0.89.

I have to say, though, I don't even look at price anymore. I just get what I need and don't worry about it, so that I don't go eat the crap they serve at the drive through. I alot $100/week on groceries for myself and usually beat that budget (usually spend about $60 - $65), even though I'm buying for nutrition and not even looking at the price.

T1000's picture

That's entirely the problem, isn't it. We equate calories with food, but that shit in McDonalds has only the appearance of food. All of a sudden, the corporations start to switch inputs to find cheaper and cheaper substitutes, but as long as we maintain calories, whats the bfd. Soon we'll be adding plastic like the Chinese to our food supply to lower costs. 

I get your point if you're comparing calories to calories, but then we've lost sight of what food is at all. Watch super size me and see what that food will do. Here's a hint to anyone that hasn't seen it: the food will kill you. Real, organic food is health, it is medicine, it is from the creator. This man made shit is poison. 

Then they place you in the medical institutions and siphon of whatever energy and money you have to fix the problem that started with the .89 cent "burrito"


Schmuck Raker's picture

Well, if all you're worried about is getting as many calories as possible, at any price, here's the strategy for you:

Let me know if I can contribute in any way.

boattrash's picture

Yummie! Could you please bring me anonther slice of Soilant Green with that?

Zgangsta's picture

Are you also pricing in your labor costs to transport, prepare, serve, and clean up after your meals?

Mike in GA's picture

Labor cost doesn't matter if I or my wife is cooking. 

Transport to restaurant vs to grocery store the same.  But I go to the grocery store once per every 5-10 meals.  Time to prepare, serve and clean?  By the time you get there, park, get seated, get waited on, get your drink and salad, I'm halfway through preparing say - a meatloaf, fresh-out-of-the-garden turnip greens and salad and will have leftovers for two more meals.  I clean while I cook so when the food is done, the kitchen's clean.  No extra time necessary to allocate for cleaning or serving.  Just 2 of us. 

By the time you leave the restaurant the meat loaf is cooked and tomorrow is just a reheat.

s2man's picture

"fresh-out-of-the-garden turnip greens and salad"?

Do you mean you grow your own food? But, but, that is interfering with interstate commerce. Better watch out.

That reminds me, time to breed the rabbits again...

navy62802's picture

Wendy's Double Stack (470 calories) = $0.99

McDouble (390 calories) = $1.00

Janice's picture

McRib is $1.99

fuu's picture

Charts from Bureau of Economic Analysis, BofA Merrill Lynch Global Research. Are we sure these folks can even spell food?

alien-IQ's picture

Sorry but these assumptions that it is cheaper to eat out then to shop and cook is, in a word, bullshit.

Perhaps it may be true that it's cheaper to go to McDonalds and eat there than it is to buy a steak and make it at home...but that's not the same food is it?

I cook. Everyday. By choice because I enjoy doing it and eating it and I'm good at it. But I also eat out on occasion. Not at fast food joints or chain restaurants...I prefer to eat at decent places if I'm going to eat out. No fuckin way in hell is the price even remotely compatible for the same meal cooked at home vs. at a restaurant.

I'm calling bullshit on these "statistics".

akak's picture

I think the point of the article was not that it has become cheaper in an absolute sense to eat out vs. prepare meals at home, but that the price difference between the options is narrowing.  It will ALWAYS be cheaper to eat at home vs. eating the same or equivalent meal in a restaurant.

But personally, I deplore the current trend toward eating out (particularly in bland, homogenized national chain restaurants) vs. cooking at home.  I myself only eat out rarely, NEVER eat any sort of so-called fast food (last time in a Wendy's was in 1987, in a McDonalds was in 1984), and prepare as many of my meals as possible from scratch.  Nobody taught me to do so, either --- if you can drive a car or operate a computer, you can certainly learn how to cook to a sufficient degree to free yourself from the expense and negative health ramifications of eating the poisonous swill that passes for "fast food" in the USA today.

smiler03's picture

"Bank of America's Economics team have found some extremely timely'inflation' signs in the food industry, where it is becoming, somewhat incredibly in this age of supposed frugality and deleveraging, cheaper to eat-out than to cook-at-home."

l-O-l's picture

I junked you because you need to learn to read.  NOBODY is suggesting it's cheaper to eat out.  It's not.

What's happening is that restaurants are better able to absorb food inflation costs than the grocery stores who didn't have very large margins to begin with.

Thus, it's cheaper ON A RELATIVE BASIS to go out than it is to eat at home.  Whereas $X may have bought 10 meals home for every meal out, it now only buys 8.  It is therefore rational that the percentage of meals eaten out increases.

Put another way, the restaurant premium -- labor and overhead as a % of food cost -- has dropped significantly because restaurant meals are more elastic than groceries.