I do not think that this factor accounts for all the excess inflation, but crop production is still fairly heavily regulated by the federal government. This is largely a legacy of the New Deal. My wife worked for a milk production and delivery company and the paperwork was ridiculous. You also have agricultural subsidies, food stamps, ethanol mandates, etc.
I would be interested in seeing an analysis that comparing price inflation of regulated crops versus non-regulated crops.
In $100 spent on groceries, $7 is the cost of the agricultural product. The rest is food processing, trucking, cpg, marketing, etc. There is also a price elasticity. People value their time more and would rather not cook. So they eat out more. The market has not yet priced in negative externality of unhealthy food that drives diabetes. There may be enough extras spending available, latent demand, for food products that trade healthcare cost for healthier food if tasty. GLP1 may trigger the renaissance.
Definitely agree that the cost of farming isn't the only determinant. But I think a lot of the downstream supply chain costs of food e.g global shipping, domestic trucking, and then rent and labor for retail point of sale, are shared with e.g Clothing which has deflate a lot, so there's still a puzzle in my view.
Lets assume all the intermediate costs are value add. Architecturally 50 years ago we innovated product features in food, leading to more scale, and then process innovation. Modularity set in to optimize process further. Creating lower price and rigidity. Horizontally integrated. We solved for low cost calories.
Just as we shifted from "Fast PC processing" to "Portbale power efficent processing", are we at a point where the Y axis should change from cheap calories to afforable nutrition. Solving for cost of food and cost of healthcare.
If so, we need a phase of vertical integration. To realign product features. Going from yield per acree to nutrition per bushell. The other $93 is available to realign the food system perhaps disrupting how we retail food (Assemble it yourself or have a nutrtionist asemble it for you).
We frankly are at a perfect cross roads of economics, health, peak of s-curve innovation, and GLP-1 disruption. This is exactly when these kind of disruptions take hold.
It also varies depending of state of industry. If vertical, going horizonal realigns process optimization. If horzontal, going vertical realigns product features.
In a sense it comes down to modularity. The firm should be organized around the product features that require a lot of feedback loops. Because you can really only optimize those things within a firm that maximizes communications, knowledge, etc around the optimization of a thing.
So in a car, there is a natural optimizaiton around an egnine, the tires, the body. Each is complex in its own instance, but there is not a lot of coupling to the other things (relatively) to achieve the best design.
As you move to soemthing like EV, there is more coupling. You are trying to optimize drive time, so need to optimize aerodynamics, computer, batteries, drive train as one thing. (Vertical). In time as the form factor and dominate design is worked out, the motors can break off an be optimized by a subcontractor for process design to lower cost.
It’s why when people talk about raw material costs I roll my eyes. 1/3 of all groceries get thrown out by the store. “Fruit rotting on the vine”, it’s literally rotting on your store shelf’s for marketing purposes.
There is no “market” for healthcare cost. It’s all subsidized by insurance and you can’t charge higher premiums for obesity. Our fattest are often on government programs like Medicaid.
In Japan companies are charged more for healthcare if their employees are fat.
Employers may be required to pay more into the national health care system if the waistlines of employees, their families and retirees exceed the government's limits of 33.5 inches for men and 35.4 inches for women.
Isn't most of the increase in prices a product of the Boumol effect? The fact that they're non tradeable labour intensive low productivity growth services. Also I'm not an American but what is the difference between hospital services and medical services.
That is definitely part of what explains the growth of the fastest growing items, but this doesn't really describe food. It's a highly tradeable and capital intensive supply chain, especially grocery store food.
I wonder if the housing and shelter prices really do track say rents of the same ore truly equivalent houses and apartments and not average rents/house prices of a category? It is certainly harder to do with real estate than with automobiles. Could there be subtle quality differences that the average does not pickup? Ditto for child care. I can imagine doing a hedonic adjustment for child care very difficult.
@Maxwell Tabarrok, this is indeed a strange finding. I am a bit surprised that the data shows American’s eating out more. My personal experience is that we eat out far less because doing so has become cost prohibitive. It costs at least double to eat out than it does to eat at home, and the home food prices themselves “feel” that they have doubled since the pandemic.
Pikettay had a chapter about this in his "Capital" book. He argued that generally, goods went up slower than inflation or even decreased, while services went up much higher. Food he argued was a weird mix of both, so it ended up being generally (over the past century) increasing at the medium level of inflation.
Yeah maybe I am just underrating how much extra labor goes into food production. But from my layman's POV it seems like a lot of the supply chain costs of food e.g global shipping, domestic trucking, and then rent and labor for retail point of sale, are shared with e.g Clothing which has deflate a lot, so there's still a puzzle in my view.
In most economists models of housing costs, the most important input is the unemployment rate, which is presumed to be the main driver of wages and salaries for individuals. Intuitively this makes sense to me. Housing is scarce, so its cost is driven by what people can afford to pay. It would make sense to me if food away from home is also driven by wage growth/ affordability. I also don't want to give up this luxury.
Is the increase in food cost perhaps tied to the cost of energy, most particularly petroleum and petrochemical prices (not just transportation cost but fertilizer, irrigation and other costs related to food production as well).
Wouldn't it make sense to look apples-to-apples here (literally)? In-store cost of fruits, veggies, meats, nuts, eggs, etc. ("real" food) over time. According to this (https://data.bls.gov/pdq/SurveyOutputServlet), a dozen eggs was ~$1 in 1980 and stayed there for a while. Currently it's ~$3 but maybe that reflects some lingering supply chain snags and we should think of the underlying price as more like ~$2.50? So 2.5x price change vs. ~4x in the overall CPI since then.
Just spitballing, no special insight here. But I could see a situation where the food price numbers are swamped by compositional effects (how do you account for energy drinks or whatever)?
Don’t underestimate the amount of hedonic adjustment being made in manufactured items whereas food is not adjusted. https://www.bls.gov/cpi/quality-adjustment/home.htm It’s probably fair to do it this way, but it leads to some counter intuitive results. A computer probably costs the same as it did say 10 years ago, but it is more capable, so prices are hedonically adjusted, but it has roughly same amount of stuff in it in terms of atoms and labour as the 10 year old computer. So we see effective deflation of a given amount of atoms and labour when they are in a computer, but not when they are in food.
A couple of drivers of food prices surely involve the US's policies on sugar and corn-based ethanol.
Not unless those policies have been changing.
I do not think that this factor accounts for all the excess inflation, but crop production is still fairly heavily regulated by the federal government. This is largely a legacy of the New Deal. My wife worked for a milk production and delivery company and the paperwork was ridiculous. You also have agricultural subsidies, food stamps, ethanol mandates, etc.
I would be interested in seeing an analysis that comparing price inflation of regulated crops versus non-regulated crops.
Hmm interesting. Agricultural productivity has still performed very well though
In $100 spent on groceries, $7 is the cost of the agricultural product. The rest is food processing, trucking, cpg, marketing, etc. There is also a price elasticity. People value their time more and would rather not cook. So they eat out more. The market has not yet priced in negative externality of unhealthy food that drives diabetes. There may be enough extras spending available, latent demand, for food products that trade healthcare cost for healthier food if tasty. GLP1 may trigger the renaissance.
Definitely agree that the cost of farming isn't the only determinant. But I think a lot of the downstream supply chain costs of food e.g global shipping, domestic trucking, and then rent and labor for retail point of sale, are shared with e.g Clothing which has deflate a lot, so there's still a puzzle in my view.
Lets assume all the intermediate costs are value add. Architecturally 50 years ago we innovated product features in food, leading to more scale, and then process innovation. Modularity set in to optimize process further. Creating lower price and rigidity. Horizontally integrated. We solved for low cost calories.
Just as we shifted from "Fast PC processing" to "Portbale power efficent processing", are we at a point where the Y axis should change from cheap calories to afforable nutrition. Solving for cost of food and cost of healthcare.
If so, we need a phase of vertical integration. To realign product features. Going from yield per acree to nutrition per bushell. The other $93 is available to realign the food system perhaps disrupting how we retail food (Assemble it yourself or have a nutrtionist asemble it for you).
We frankly are at a perfect cross roads of economics, health, peak of s-curve innovation, and GLP-1 disruption. This is exactly when these kind of disruptions take hold.
I don't have an intuitions for why vertical integration would realign product features. Any recommended reading?
Mastering the dynamics of innovation https://amzn.to/3ABHiKa
It also varies depending of state of industry. If vertical, going horizonal realigns process optimization. If horzontal, going vertical realigns product features.
In a sense it comes down to modularity. The firm should be organized around the product features that require a lot of feedback loops. Because you can really only optimize those things within a firm that maximizes communications, knowledge, etc around the optimization of a thing.
So in a car, there is a natural optimizaiton around an egnine, the tires, the body. Each is complex in its own instance, but there is not a lot of coupling to the other things (relatively) to achieve the best design.
As you move to soemthing like EV, there is more coupling. You are trying to optimize drive time, so need to optimize aerodynamics, computer, batteries, drive train as one thing. (Vertical). In time as the form factor and dominate design is worked out, the motors can break off an be optimized by a subcontractor for process design to lower cost.
+1
It’s why when people talk about raw material costs I roll my eyes. 1/3 of all groceries get thrown out by the store. “Fruit rotting on the vine”, it’s literally rotting on your store shelf’s for marketing purposes.
There is no “market” for healthcare cost. It’s all subsidized by insurance and you can’t charge higher premiums for obesity. Our fattest are often on government programs like Medicaid.
In Japan companies are charged more for healthcare if their employees are fat.
Interesting! Do you have a source where I can read up on the Japanese insurers or employers charging more for fat people?
Google: japan obesity insurance employer
Employers may be required to pay more into the national health care system if the waistlines of employees, their families and retirees exceed the government's limits of 33.5 inches for men and 35.4 inches for women.
Isn't most of the increase in prices a product of the Boumol effect? The fact that they're non tradeable labour intensive low productivity growth services. Also I'm not an American but what is the difference between hospital services and medical services.
That is definitely part of what explains the growth of the fastest growing items, but this doesn't really describe food. It's a highly tradeable and capital intensive supply chain, especially grocery store food.
I wonder if the housing and shelter prices really do track say rents of the same ore truly equivalent houses and apartments and not average rents/house prices of a category? It is certainly harder to do with real estate than with automobiles. Could there be subtle quality differences that the average does not pickup? Ditto for child care. I can imagine doing a hedonic adjustment for child care very difficult.
@Maxwell Tabarrok, this is indeed a strange finding. I am a bit surprised that the data shows American’s eating out more. My personal experience is that we eat out far less because doing so has become cost prohibitive. It costs at least double to eat out than it does to eat at home, and the home food prices themselves “feel” that they have doubled since the pandemic.
Pikettay had a chapter about this in his "Capital" book. He argued that generally, goods went up slower than inflation or even decreased, while services went up much higher. Food he argued was a weird mix of both, so it ended up being generally (over the past century) increasing at the medium level of inflation.
Yeah maybe I am just underrating how much extra labor goes into food production. But from my layman's POV it seems like a lot of the supply chain costs of food e.g global shipping, domestic trucking, and then rent and labor for retail point of sale, are shared with e.g Clothing which has deflate a lot, so there's still a puzzle in my view.
You have as much of those as with clothing, but food is cheaper per item so it accounts for more of the total cost.
In most economists models of housing costs, the most important input is the unemployment rate, which is presumed to be the main driver of wages and salaries for individuals. Intuitively this makes sense to me. Housing is scarce, so its cost is driven by what people can afford to pay. It would make sense to me if food away from home is also driven by wage growth/ affordability. I also don't want to give up this luxury.
Is the increase in food cost perhaps tied to the cost of energy, most particularly petroleum and petrochemical prices (not just transportation cost but fertilizer, irrigation and other costs related to food production as well).
But wouldn't this show up in lower agricultural productivity?
Wouldn't it make sense to look apples-to-apples here (literally)? In-store cost of fruits, veggies, meats, nuts, eggs, etc. ("real" food) over time. According to this (https://data.bls.gov/pdq/SurveyOutputServlet), a dozen eggs was ~$1 in 1980 and stayed there for a while. Currently it's ~$3 but maybe that reflects some lingering supply chain snags and we should think of the underlying price as more like ~$2.50? So 2.5x price change vs. ~4x in the overall CPI since then.
Just spitballing, no special insight here. But I could see a situation where the food price numbers are swamped by compositional effects (how do you account for energy drinks or whatever)?
Don’t underestimate the amount of hedonic adjustment being made in manufactured items whereas food is not adjusted. https://www.bls.gov/cpi/quality-adjustment/home.htm It’s probably fair to do it this way, but it leads to some counter intuitive results. A computer probably costs the same as it did say 10 years ago, but it is more capable, so prices are hedonically adjusted, but it has roughly same amount of stuff in it in terms of atoms and labour as the 10 year old computer. So we see effective deflation of a given amount of atoms and labour when they are in a computer, but not when they are in food.
Beverages are addictive. Coke, Starbucks, liquor, Monster energy, etc. In that way beverages are more like tobacco than like eggs.
I don't believe that the average hourly wage increased faster than the cost of housing
Average is different from median.
I understand this. My point remains
I don't understand, would exploding CEO comps not have an outsized effect on the average income?
Yes but not much of one. The number of CEO's is really small.