Federal Reserve Chart Reveals Who Is Getting Screwed by Recent Commodity Price Increases

New York Fed economist Jomathan McCarthy is out with new data showing just how badly the recent increases in commodity prices have impacted households. Not surprisingly it is the poor that are heavily impacted, but there is not insignificant impact for a larger segment of the population.  McCarthy writes:

....the budgets of lower income households have likely suffered a pronounced hit from this recent commodity price surge because they typically spend a greater share of their income on food and energy. I conclude that these households may have to cut back on much more of their other spending than the average family does...

My analysis of data from the Bureau of Labor Statistics’ Consumer Expenditure Survey (CEX) shows that lower income households spend a higher share of their income on food and energy—around 18.5 percent, compared with the aggregate share of about 13.75 percent...

The chart below shows the share of food and energy expenditures for different income quintiles compared with the aggregate food and energy share of spending in the CEX. (An income quintile represents 20 percent of households, according to their reported before-tax income.) A value of 1.0 means that the food and energy expenditure share is equal to the aggregate share (aggregate food and energy expenditures divided by aggregate total expenditures). In fact, the chart shows that it is the fourth quintile (the 60th to 80th percentiles) that has a value near 1.0, indicating that most households have a food and energy expenditure share that is above the aggregate share.

More broadly, these relative shares support the common intuition that poor families spend more of their income on food and energy. The share for the lowest-income quintile is the highest, averaging about 135 percent of the aggregate share, while the share for the highest-income quintile averages about 75 percent of the aggregate share...

These differences are notable, but ordinarily they are just not significant enough to support the view that commodity price increases lead to large drops in the disposable income of lower income households....

However, because of the large rise in consumer energy prices in the first quarter, this aggregate purchasing power measure fell by 0.45 percent of PCE, equivalent to over $45 billion at an annual rate (in contrast, because the rise in consumer food prices was less extreme, its effect on aggregate purchasing power was less than 0.05 percent of PCE). With aggregate effects of this magnitude, there is a larger effect on lower income households: Performing a calculation similar to the one in the previous paragraph, we find that the purchasing power impact on lower income households is about 0.6 percent of their spending. Because many of these households have tight budgets and few assets, such a drop in discretionary income can impose notable constraints on their spending.

There are two important take aways here, beyond the obvious. McCarthy's data suggests that, unlike contentions by other Fed economists, the impact of price inflation does not spread across the entire economy uniformly. And secondly, McCarthy's report shows that by Fed Chairman Bernanke's focusing, along with many other economists, on core inflation, which excludes food and energy, he is missing the damaging impact that climbing food and energy prices have on especially the poor.