Prices Rising, Prices Falling
The big news of late is how much more expensive it is to a) eat, and b) get around.
These are pretty basic needs. Most of us can’t walk everywhere we need to go and even if we could, the cost of fuel is pushing up the goods and services that have to be transported to the stores where we buy them. Eating… well… that just goes without saying.
So why does the consumer price index make it look like we’re in such fine shape? Inflation, while pinching us at the gas pump and in the supermarket, doesn’t seem to be reflected in the numbers we hear on the news. That’s because there are a lot of things that make up the Consumer Price Index (CPI) basket including:
- Food – 18%
- Shelter – 27.9%
- Household operations and furnishings – 10%
- Clothing and footwear – 6.6%
- Transportation – 18.3%
- Health and personal care – 4.3%
- Recreation, education and reading – 10.4%
- Alcoholic beverages and tobacco products – 4.5%
The products in the basket are weighted based on their common usage – those are the percentages. The weights determine the impact that a particular price change will have on the overall consumer budget. For example, a 5% rise in the price of milk would have a much greater impact on the average budget of consumers than a 5% increase in the price of tea, because people spend on average more money on milk than they do on tea. The weight for Canada assigned to milk (0.69%) is greater than that of tea (0.06%). Without weights, price changes for all commodities in the CPI basket would be given equal importance in the calculation of the All-items index. Here’s one of the problems: according to their own documentation the current set of weights refer to household expenditures for 1992.
With housing prices having skyrocketed in the last decade, me’thinks the numbers could be a little off. Housing is eating way more than 28% of our budgets in many parts of the country. Ditto the fact that while some costs have risen dramatically affecting everyone’s budget, others have fallen, affecting only some people’s budgets.
The costs of computers, TVs, software, audio equipment, clothing, appliances and new cars have gone down, offsetting the increases in things like food and gas, to make inflation appear less dramatic than most of us are actually feeling in our wallets.
And while the price of a box of yogurt may appear to have remained stable, food manufacturers are dealing with the increases in costs not by raising their prices, but by reducing the amount they put in the box. So quantities are going down, while prices seem to remain stable. (Have you noticed that your food containers hold less food? Check it out.)
Ultimately, as the costs for covering our Essential Expenses rise, less and less will be available to spend on the bottom half of the CPI basket of goods. The problem with that is a vicious cycle: we don’t buy TVs or cars and the manufacturers have to lay off the workers who build them; then people laid off don’t have the money to keep body and soul together.
This would have started a long time ago had so many people not had credit available to buy the things they really couldn’t afford. We’ve been buoyed by a credit bubble that’s burst in the U.S., Australia, and elsewhere around the world. Don’t let the pundits fool you. We’re in deep doo doo and we’d better learn to live on what we make FAST.
There is no doubt in my mind that we will see increases in unemployment across the country as we come to terms with our new economic reality. The really sad part is that we might be able to hold on with one income in our family, if we didn’t owe money to every Tom, Dick & Harry. With our debt loads having reached record levels, we don’t stand a hope if we don’t get ourselves in the black. And SOON.
The economy, like the stock market and life itself, is a cyclical thing. Where we are today is not where we will be in six months, a year or a decade. But if we don’t have the tenacity (and the emergency fund) to hold us through the bottom of the cycle, the cost emotionally and to our families’ sense of well-being can be devastating.
So, what’s it going to be? A new TV? A better cell phone? Or the peace of mind that comes from knowing you can weather the economic storm that may or may not be just around the corner?
Tags: CPI, Economics 101, inflation
August 1st, 2008 at 9:58 am
I’m actually not unhappy to see food prices rise. We buy and waste so much food because it is dirt cheap. In North America we spend the least amount of our incomes on food (~17% v. 25% in Europe and up to 80%+ in parts of the developing world). And nearly 1/4 of the produce we buy goes to waste. That is something we should be ashamed of in a world where 35,000 children die of food-shortage related reasons every day.
Most of us are also eating way too much and way too much overpackaged processed crap (which is more expensive than whole foods).
I’d love to see us pay higher prices for quality food, not waste as much, and not eat as much. Our pocketbooks would be fine. Our health would be better and it would be gentler on the planet.
(When the US embargo was imposed on Cuba stopping the inflow of cheap fossil fuels Cubans all lost an average of 20 lbs and started a revolution in high-yield organic urban gardening. Great things can happen when people are faced with a challenge!).
August 1st, 2008 at 12:03 pm
Great post. Absolutely the choice should be for putting some cash away. I believe we should be doing this during great economic times as well.
I do agree with Amy’s response as well…less food wasted and less food put on your waist wouldn’t be a bad idea at all!
August 1st, 2008 at 12:45 pm
Run for the hills! Stock up the pantry and hunker down for a storm, ’cause there is an ill wind blowing and it’s going to blow hard.
Forget the new TV, cancel the cellphone entirely, it’s time to unplug and simplify. (Not the web though, I can live without the cable TV but not Gail’s posts! LOL)…
Maybe it’s time to dust off the old bicycle too while your at it.
Case in point: That carbon offset tax just implimented in BC (as of July 1, drivers pay an extra 2.4 cents per litre of gas and it will rise to 7.2 cents by 2012!!!!). A great idea in theory, trying to encourage us to drive less…. BUT every single supply and resource that needs to be transported will be more expensive to ship too! SO every single thing that we rely on from anywhere but our own back yard will have to be more expensive…. oh boy, just what we need!
We may need to go back to having “war gardens” to just to afford vegetables, and maybe keep a couple chickens on the patio.
And since we are on the subject of food: Why is is that packaged, marketed, processed, salt-laden CRAP convenience food is SO MUCH CHEAPER than whole food? I can buy a stupid frozen entree for less than a single fresh red bell pepper, or an organic apple!
Talk about waste.
August 1st, 2008 at 1:15 pm
For me it’s about peace of mind! So much so, now I even wait 2-3 months to rent DVD’s, whereas before I just bought them without thinking! I’ve slashed my grocery bill by about 70%, so I think people can save a lot of money just by making changes to how/what they eat!
August 1st, 2008 at 2:26 pm
Slashed your food bill?! Wow, I was just lamenting at lunchtime that my grocery expenses since 2005 just increased 50% this month! Pasta, sauce, and bread at .99 cents is unheard of now…thankfully I stocked up on bathroom tissue, kleenex, and such a month ago so I’m good for a year! Methinks the new prices are here to stay for a bit, so I have to readjust how I eat, which is all relatively healthy. No more of the organic stuff though maybe, just long enough to correct for a terrible month at the grocery stores. Ugh…it was awful and I’m embarrassed to admit to my husband how much it was.
August 1st, 2008 at 2:59 pm
Tracy J:
I think that some of the prepared/frozen food may be made using a different grade of food. I only see grade A eggs at the supermarket. The lower grade is likely to make it into the ‘ready to eat’ food and this lowers the cost of raw ingredients. Some of this food can have a longer shelf life (especially frozen), so losses due to spoilage are lower.
August 1st, 2008 at 6:49 pm
It’s certainly frustrating to go for groceries each pay - with my list in hand, trying very hard to stick to my list and I cannot get my bill down. I don’t spend a lot on meat. I try to buy more quality foods than convenience foods. When staples have doubled in the last 2 years, it’s hard to make up for that. I found it was a lot easier to slash your food bill when I only had my own needs to consider. I try to keep in mind that we rarely eat out and we both take our meals to work with us.
I’m trying to cut costs by buying in bulk. It is helping in some ways. I really look at the cost in bulk and compare it to see if I am actually getting a better value.
Tracy J, you’re so right. A storm is a comin’ and we better be ready for it.
It’s time to be mindful of how we spend our money & our time.
My husband & I have had a garden for 3 years now. I find the challenge is eating the food before it spoils. We’ve tried freezing the beans & carrots but they just don’t seem to freeze well. I’ve tried blanching them too. This year I’m going to try pickling some of the veggies. I also started making my own jam this year. It’s nice to know I made it and my family enjoys it. I know some will say “I don’t have time for that”, but consider it’s a great way to spend some time with a friend or loved one. Last winter my girlfriend & I got together and made a bunch of food we could freeze for entertaining over the holidays, plus we made Red Pepper Jelly to have on hand for gifts. We went shopping for the groceries together and containers to freeze them in. Then we split the cost. It saved us both time & money. It was a big hit and we had a lot of fun together. This year we are planning to make jam together and likely more RP Jelly.
We’d love to be able to have a few hens for eggs. We are near the suburban area of our city and might be able to get away with it. A couple in the city had a few hens and it cause a big issue with our city council. They were forced to give up the hens.
August 1st, 2008 at 7:26 pm
In my city apparently we are allowed 3 hens (within city limits) but no roosters. I think that is very funny. Someone tried having PET goats an as a side effect they controlled the brambles and blackberries in their yard, unfortunately they had to get rid of them, too loud (I guess weedwhackers and pesticides are better?) I don’t know anyone who takes advantage of the hen bylaw, but I do find it interesting.
August 2nd, 2008 at 3:04 pm
Gail,
I know the CPI isn’t how people spend their money but I did an exercise where I took an average family income of A)$70K ($100K gross)
and B)$35K (approx $50K gross) and made a spreadsheet based on the percentages of the CPI. It is eye opening to see how much money can be spent monthly and annually in each category with Family A and where Family B would have to adjust.
It is interesting to do a quick comparison with some of the expenses I know off the top of my head (rent in our area, how much we spend on food, fuel, etc) and see how those in Family B can be affected with any minor changes.
The exercise also does not account for savings and retirement so I went through and took 10% from each category monthly and then calculated that out annually. I am shocked to see how much could be saved with so little effort!
Looking at this spreadsheet I get a better appreciation of budgeting as well as insight into how you do the amazing job you do and how with a little effort people could keep themselves from debt.
August 2nd, 2008 at 7:56 pm
IT IS NOT OK TO RAISE THE COST OF FOOD!!!! you guys are crazy, food is a life necessity and that’s all well and good that wasteful people may smarten up a bit by not tossing a 1/4 of it to the trash but as for the people who struggle to feed their families… thats’ insane to even suggest that that is a humane option.
i doubt the food budget is what sends people to bankruptcy. it’s the buy now pay later, its the tv’s they have to have, the new car, trips on credits etc. it’s the greed. don’t punish the poor to help middle class suburbia be less wasteful.
for those who need incentive to not waste, paying per bag for garbage pick up is a fabulous idea. some municipalities are doing that already. bravo!
i say increase the cost of anything but life necessities. necessities like gas, food, housing.
tax all electronics as most of them are not a necessity and e-waste is horrific on the environment.
we eat all fresh produce and meat in our house, no pre-prepared stuff (or very little) and our budget suffers. pre-prepared crap is MUCH cheaper but less healthy! go figure…
August 2nd, 2008 at 7:57 pm
It has occurred to me that the credit crunch has driven us into the worst of times. My debt load is not extraordinary and my husband and I have good incomes. Our kids are grown and flown. My focus is on paying down the debt I have, the faster the better (don’t worry Gail - retirement savings are in place), but what that means is that I am not consuming “stuff”. No new clothes this summer, nothing for next winter unless it’s actually worn out. We’re fed well, but we’re eating at home, the cars are gassed up and maintained, (we need two - mine is actually a business expense) but that’s just about it. The problem is that if everyone does what we’re doing, the consumer economy goes splat and people whose jobs depend on other people buying “stuff” lose them. As I said, the worst of times. Now, I’m hardly arguing in favour of buying stuff - I think we buy way too much stuff, but I’m aware that tough love for the economy is going to be very tough for everyone and catastrophic for some. We can’t live the way we’ve been living and expect nothing will change.