Commodity Inflation And Spare Capacity: Food For Thought

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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