Food and Energy Prices: Lessons From the '70s

Excerpt from Raymond James Economist Dr. Scott Brown's latest economic commentary:

Most likely, the Fed will trim short-term interest rates once more. However, as it looks ahead, the Fed must remember the lessons of thirty years ago and avoid accommodating higher food and energy prices.

In the 1970s, oil price shocks had a more immediate impact on the economy. People paid for gasoline mostly with cash. Spending more to fill your tank left less money in your wallet to spend on other things. Currently, most consumers use credit cards for routine purchases. As a result, one doesn’t feel the sting of higher energy prices right away. However, consumers will adjust their spending habits over time. On the business side, there is now a well-developed futures market. Oil prices can be smoothed over time – hence, a smaller response to oil price shocks. Major energy users will hedge their energy costs, but there are limits to how long you can do this.

Union membership is a lot lower now (as a percentage of private-sector employment) than it was 30 years ago. In the 1970s, the government began indexing Social Security and other programs to the Consumer Price Index. The unions thought that was a good idea and began embedding “cost-of-living” increases into wage contracts. As oil prices spiked, the CPI rose, and so did union wages. Non-union wages followed and we were off to the races on inflation.

Still, while there are a number of reasons to expect a more muted response to energy price increases these days, pass-through effects seem likely to matter eventually. As gasoline prices began to rise a few years ago, the transportation sector was able to squeeze out efficiencies to make up for it. Yet, there are limits to those kind of efficiency gains. However, to date, energy price pressures do not appear to have bled through at all to higher prices of core consumer goods.

Comments

[icandoitdon]

what utter nonsense.

credit cards give consumers a 30 day respite from paying for merchandise. if they don't make payment in full they carry the additional burden of exorbiant interest charges on their purchase.

debt is part of the problem, einstein, not part of the solution.

[JohnPseudonym]

"However, to date, energy price pressures do not appear to have bled through at all to higher prices of core consumer goods."

You need to ask you're butler if the price of the food he's feeding you has gone up...

Anyone that buys groceries can plainly see sharp jumps in food costs.

Here's mine over the last 6 months or so:

Milk: $2.69 to $3.49 > 30% increase

Kids favorite hot dogs: $2.79 to $3.89 > 39% increase

Baby carrots: $1.25 a bag to $1.69 > 35% increase

These are WalMart prices too; not some fancy designer grocery store.

I can't name a single food or consumer good that I've seen the price drop.

You need to get out of the office/house more...

[huskerbob]

If the core cpi reflected life on earth as we know it, you would notice that energy price pressures appear to have bled through into the price of food.
That's great that consumers don't use cash anymore, but they are building debt and that just creates a much bigger problem a few months down the road.
And there is evidence that consumers have already adjusted their spending to account for rising energy and food prices. Notice any declines in stocks of companies offering non essential goods and services like Starbucks or Ruth's Chris? Anecdotal evidence suggests that many taxpayers will be spending their rebates and stimulus checks on food and energy, not the stuff included in the core cpi.
And how does the Fed "avoid accommodating higher energy and food prices"? They already took them out of the core cpi, so we won't have to worry about seniors adding to inflation with a bloated SS check. Maybe we could have a new symbol for the Social Security administration: a frozen octogenarian holding a can of dog food.
Not sure what the point of the article is - watch out for inflation? Inflation is created by the fed, and they are not going to stop anytime soon. Remember the lessons of the 70's? The fed will repeat the boom and bust cycle until it is abolished.

[BrucePile]

You look at the grocery figures like the ones above and you see why everyone and their dog is saying it's a crazy bubble. But a very important lesson from the 70s - and 60s and 80s and 90s - is that a commodity bull is crazy for a long time. Commodity bull and bear cycles run 10 to 20 years as we all know. But less considered is how big the smaller moves are that make up the major bulls and bears. If you examine a chart for the CRB Index going back to the 60s and fit a line through all the major move changes (a 20% swing line or such) you make an amazing dicovery. Every single up move has a duration of 2 - 4 years, and every single down move also except one. The last significant swing was from down to up in late '07. So if this past commodity behavior is any guide, the crazy bubble will go on for another 2 to 4 years!

That's not so inconceivable when you consider that oil tends to lead commodity movement, and oil will probably be working its way much higher over the next 2 to 4 years.

[billddrummer]

I've been shopping at a bag-it-yourself grocery store for several years, and have cut my food budget by 40%. It's not only what you buy, but where you shop, that makes a difference in household budgets. I've seen nowhere near the price hikes cited by John Pseudonym, because the store I frequent has lower prices than Wal-mart. I know that my food will eventually rise (in fact, pasta jumped recently in response to higher grain costs), but I'm betting that I'll still be saving relative to others who shop elsewhere.

Another thing to consider is to stay away from processed foods. Energy costs represent a higher percentage of the total cost for those goods, because of the intense value-addition during the manufacturing process. Buying fresh foods cuts that impact significantly. But then, you have to actually cook the food you buy. A lesson in self-reliance for all of us.

[cruiser9805]

I agree with Bruces. We are at the knee of the exponential growth in commodities. Problem is as oil prices go up and people's credit is maxed out, you will see gas use go down. It already went down from 1.6 billion bpd to .9 billion bpd. So what happens? Oil won't go down, it's a speculative stock. So you'll pay more for items (food, appliances, etc, etc) leaving less of a margin for companies. Also India will get hit, a lot of our outsourcing that went over there will get cancelled due to weak dollar and inflation in India. Where it will end? Your speculation is good as mine. All i know is i am heavy in gold.

[AmesTiedeman]

The Fed should stay put. Let the market work some of this out for itself. Save the powder for unforeseen bigger problems later.

[galewhitaker]

I agree with commenters. This is junk. Desiel is used for food production from plow to plate. Get a grip on the situation before you comment.

[wakeupamericasoon]

Diesel is a dollar over gasoline's price...at the pump, truckers move everything, what goes up for us in energy costs is reflected in transportation charges so all consumables are going up. People stop spending on un needed items when the dollar inflates. Everyone feels that and rightfully so. When are the "Profit up for major oil companies" devaluation of the nation, schemes by big business going to stop?

[wakeupamericasoon]

Diesel fuel at the pump is a dollar over gasoline. We feel the pinch of big business (oil) greed (Oil company profits are up) and the truckers suffer too. Transporting goods means burni9ng fuel and every consumable goes up. When the average Joe can barely get what he needs the exras get cut out and the economy feels the pinch.
Not rocket science, big business. your lobby dollars at work.

[mlyn]

check out this article by political commentator, Kevin Phillips:

www.tampabay.com/news/...#

[lefty]

All I know for sure is that when I retired 10 years ago I could save $1000 per month.
Now I run $500 negative. Have a fishing boat I cannot use, and a 10 year old truck I cannot afford to drive.