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Resesurdhi Depairtaneimit April 26,1974 F o o d Fttfl©! surnd F & m ife Consumer food prices have increased 18 percent over the past year and— because of the rise in staple foods— the cost increase has been even greater for low-income families. This information hardly surprises, but merely reinforces the sentiments harbored by the be leaguered consumer every time he has reached the checkout counter in the past year. But in this infla tionary era, the rise in food prices has been eclipsed by annual in creases of 39 percent for gasoline and 58 percent for fuel oil. If any thing, the combined scarcity and greater cost of gasoline has made an even deeper impression upon the consumer as motorist. These developments raise the question as to how well the consumer is adjust ing to the upsurge in prices of these key budget items. Price increases of this magnitude for food and fuel far exceed the 10-percent rise in disposable per capita income recorded during the past year. However, because of the slower rise of other consumer prices, the total impact upon con sumer expenditures has been much less dramatic. Expenditures for food (except beverages) amounted to less than 16 percent of total dis posable income last year, while expenditures for fuel oil, utilities, and gasoline and oil amounted to little more than a third of food outlays. Nonetheless, if consumers are to maintain their consumption of these increasingly expensive budget items, they must forego or restrict purchases of other com modities and services. Digitized for FR A SER Where does the dollar go? In recent years, the largest portion of after-tax income has gone to housing—the expenses and services connected with shelter. Since the mid-1950's, the housing share of disposable income has been fairly constant at about 26 percent of the total. Over this period, however, food accounted for the largest shift in consumer expenditures, exhibiting a sharp decline in its budget share. From a high of nearly 29 percent of disposable income in the post World War II inflation, the propor tion of after-tax income spent for food declined steadily to just under 151 percent in 1971, before turning /2 upward again in 1972-73. This foodbudget share was well below that reported in other major industrial nations, where food accounts for as much as one-quarter to onethird of consumption expenditures. The sharp decline in the claim of food upon the consumer's dollar allowed consumers to increase their share of discretionary purchases of other commodities and services over the past quarter-century. For example, expenditures for trans portation grew from just over 8 percent in the early 1950's to about 12 percent in the early 1970's, reflecting the completion of the Federal interstate-highway system, the flight from the cities to the suburbs, the growing size of auto mobiles and the rising number of cars per household. The budget shares of education, medical care and recreation also increased, and (continued on page 2) Opinions expressed in this newsletter do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco, nor of the Board of Governors of the Federal Reserve System. in a sense, these outlays were subsi dized by the declining proportion of income allocated to food. It should be noted that the food share can be computed in two dif ferent ways— either by measuring aggregate spending as a percentage of disposable income (a Commerce Department series) or by relating food spending to various familyincome levels (an Agriculture De partment series). The latter yields a somewhat higher figure, although the two series tend to move to gether oven time. The fam ify-......... income series specifies a family of four, with one breadwinner, one housewife, and two elementary school children as its "typical" family for budget purposes. In February, the cost of food eaten at home as a percentage of the family income varied from 23 percent for a low-income family ($4,000-8,000) to 20 percent for a family in moder ate circumstances (over $10,000). This indicates that the food share of the family budget declines as income increases, an effect known in economics as Engel's Law. (To a lesser extent, this is also true of expenditures for clothing.) Adjusting, adjusting Soaring prices obviously have forced a shift in food consumption patterns over the past year. Con sumers are free, within rather broad Digitized for FR A SER limits, to adjust their expenditure patterns, through elimination, post ponement or substitution of items. In the case of food, the alternatives are much more restricted than for durable goods; nobody stops eating altogether for very long. Nonethe less, American consumers made a most remarkable adjustment to the 20-percent hike in food prices in 1973. Despite the fact that rising food prices far outran the 10-percent increase in per capita disposable income, consumers held their out lays for food to less than 16 per cent of disposable income, match ing the 1972 proportion. This was done through adjusting downward to cheaper substitutes. In particular, per capita consumption of beef dropped for the first time in 20 years, as consumers sought out less expensive sources of protein. But as inflation continued, food pur chases exceeded 16 percent of dis posable income in early 1974. The consumer adjustment to higher gasoline prices was even more dramatic. Despite a 39-percent jump in prices, spending for gas and oil remained at less than 31 /2 percent of disposable income in the first quarter of 1974, although the share undoubtedly would have been greater if more fuel had been available. Additionally, the demand for large cars simply dried up, as a result, in an unprecedented mid-model year changeover, auto manufacturers shut down plants that had produced large cars and switched to the production of smaller cars with reduced fuel re quirements. However, there are signs that consumers are again look ing with favor upon big cars now that the oil embargo has been lifted. In the short run, say, one or two quarters, saving is the balancing item in the family budget. Con sumers tend to maintain their spending patterns in the face of changes in income or in the face of sharp increases in prices. An adjust ment in saving is an interim re sponse— witness the significant decline in the saving rate, from 7.3 to 6.5 percent, in the quarter just ended. If the changes in income or in the prices of budget items appear to be permanent, an adjustment will be made in the allocation of the consumer budget and consumers will return to their long-run pattern of saving. There are some grounds for believ ing that there will be a slowdown in the rate of inflation in the second half of the year, and that the prices of food, fuel and gasoline will level off or decline slightly. There is much less reason to believe that these prices will return to their levels of a year ago. Consequently, consumers will probably continue to spend a larger fraction of after tax income on food and gasoline at the expense of other goods. Ex penditures for discretionary budget items, such as durable goods and recreation, may be most vulnerable in this respect. Digitized for FR A SER How about debt? The boom in the durable goods and housing industries in the early 1970's boosted outstanding mort gage and instalment debt by nearly 27 percent between 1971 and 1973. But total employment increased by 5.3 million persons during the period, and the growth in jobs and in income levels supported the booming sales of homes, home fur nishings and autos. The debt-toincome ratio thus did not increase by as much as total consumer debt. Even so, repayments as a percentage of income rose from 22 to almost 24 percent, a record level of con sumer repayment liabilities. At the same time, consumer delinquency rates soared, reaching higher levels than in any recession of the past two decades. Consumer income available for dis cretionary expenditures in 1974 thus is constrained not only by the current inflation but also by the obligations incurred over the past several years. Increasing claims of debt repayments on disposable in come have reduced that fraction of purchasing power available after payment for food, shelter and taxes. But on the other hand, the real resources— autos, housing, furniture and the like— acquired in the past several years through the sharp expansion of debt have added to the consumer's stock of goods and presumably to his creature comfort. Herbert Runyon uoiSinq seM • ge ifl • u oSaJO • EpEA3f\| . oi|epi H BM EH • E | U JO p | B J • EU O ZU y BANKING DATA—TWELFTH FEDERAL RESERVE DISTRICT (Dollar amounts in millions) Selected Assets and Liabilities Large Commercial Banks Loan gross adjusted and investments* Loans gross adjusted— Securities loans Commercial and industrial Real estate Consumer instalment U.S. Treasury securities Other Securities Deposits (less cash items)— total* Demand deposits adjusted U.S. Government deposits Time deposits— total* Savings Other time I.P.C. State and political subdivisions (Large negotiable CD's) Weekly Averages of Daily Figures Amount Outstanding 4 /1 0 /7 4 Change from 4 /3 /7 4 Change from year ago Dollar Percent + + + 9,313 + 7,978 - 274 + 2,706 + 3,012 + 990 - 312 + 1,647 + 7,399 + 1,550 142 + 5,721 - 119 + 6,248 - 479 + 4,283 100 74 — 95 + 70 + 23 + 30 + 52 — 26 + 1 ,244 + 883 — 292 + 630 51 + 296 + 244 + 495 81,578 62,443 962 22,598 18,777 9,168 5,936 13,199 78,364 23,528 362 52,953 18,107 25,661 6,569 12,791 + 12.89 + 14.65 — 22.17 + 13.60 + 19.11 + 12.11 4.99 + 14.26 + 10.43 + 7.05 — 28.17 + 12.11 0.65 + 32.18 — 6.80 + 50.34 Week ended 4 /1 0 /7 4 Week ended 4 /3 /7 4 Comparable year-ago period 75 22 53 41 119 78 68 108 - 40 + 1,625 + 2,134 + 657 + - + 185 Member Bank Reserve Position Excess Reserves Borrowings Net free ( + ) / Net borrowed ( —) + - Federal Funds— Seven Large Banks Interbank Federal funds transactions Net purchases (+ ) / Net sales ( —) Transactions: U.S. securities dealers Net loans ( + ) / Net borrowings ( —) 76 16 includes items not shown separately. Information on this and other publications can be obtained by calling or writing the Administrative Services Department, Federal Reserve Bank of San Francisco, P.O. Box 7702, Digitized for FRASBRancisco, California 94120. Phone (415) 397-1137. http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis • E>|SE|V
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