Where People Spend Most on Food and Fuel

I came across this interesting chart and article about inflation around the world that I would like to share.

The bare necessities

Where people spend most on food and fuel

THE soaring cost of food and fuel is a concern for the governments of rich and poor countries alike. Many households in Africa and Asia shell-out more on food and fuel as a share of total spending and so are disproportionately hit by rising prices. But in some poor countries fuel subsidies help to ease the pain.

Load Up the Pantry

The Wall Street Journal had an article on April 23rd 2008 that explained the financial sense behind stocking up on food.  I found a copy of the article by Brett Arends on Yahoo! Finance.  He starts out the article “I don’t want to alarm anybody,” trying to soften the blow of “but maybe it’s time for Americans to start stockpiling food.  No, this is not a drill.” 

Why did he make such a recommendation.  Remember he doesn’t want to alarm anybody.  He explains,

Reality: Food prices are already rising here much faster than the returns you are likely to get from keeping your money in a bank or money-market fund. And there are very good reasons to believe prices on the shelves are about to start rising a lot faster.

The food prices are on the increase around the world.  They are causing riots in other countries.  As inflation decreases the purchasing power of your hard earned dollar, locking in on non-perishable goods makes good financial sense.  He illustrates with examples of how a money-market fund earns 2.5% and the best one year CD earns 4.1%.  Government data shows food inflation to be at 4.5% a year, and it seems that this is only the beginning.

“Load up the pantry,” says Manu Daftary, one of Wall Street’s top investors and the manager of the Quaker Strategic Growth mutual fund. “I think prices are going higher. People are too complacent. They think it isn’t going to happen here. But I don’t know how the food companies can absorb higher costs.” (Full disclosure: I am an investor in Quaker Strategic)

So why are prices increasing?  Two main reasons: First, demand is surging as China and India’s population joins the middle class.  They want to eat more and better food which has increased the demand.  The second reason cited in the article (and one of the biggest failed economic policies this country has made, in my estimation)  is ethanol.  One of the unintended consequences of this policy is that our corn supply has shrunk.  Hmmmm an increase in the demand coupled with a decrease in supply.  Thinking back to Econ 101 that would result in . . . higher prices.

I believe that stocking up the pantry is a good idea.  I have a self-reliance explaination behind why.  It is interesting to see that this is in the Wall Street Journal.

Seeing Inflation Only in the Prices That Go Up

An interesting column from the New York Times.  It deals with the fact that people only notice when prices are going up.  They don’t recognize when they go down or stay the same.  Here’s an explanation why they are:

Price increases are simply more noticeable — more salient, as psychologists would say — than price decreases. Part of this comes from the notion of loss aversion: human beings dislike a loss more than they like a gain of equivalent size. If you have to sell your house for less than you bought it for, you’re really unhappy. You hate that ground chuck now costs $2.83 a pound, but you didn’t notice that oranges are 31 percent cheaper than they were a year ago.

There is also something particular to inflation that aggravates loss aversion. Price increases are obvious. But price declines are often hidden. The cost of an item stays about the same for years, while everything else gets more expensive and nominal incomes rise.

They had a graph showing that prices have not been going up in all categories.  The prices that don’t change tend to be with goods that people don’t buy very often. People tend to remember things they do frequently,” says Stephen Cecchetti, an economist at Brandeis University who studies inflation. “And what do you buy more frequently than gas and food?”

Dollar Devaluation and Oil Prices

I recently saw on the Glen Beck Program an interesting graph.  It showed the price of a barrel of oil in terms of dollars and the same oil in terms of euros.  The price of oil in terms of dollars had increased significantly, while the price in euros was higher over time but not as much as the dollar price. 

I went out looking for data to confirm or refute what I saw on television.  I came across The Impact Of Dollar Devaluation On The World Oil Industry: Do Exchange Rates Matter?written by Dr. AF Alhaiji, an energy economist and an Associate Professor at the College of Business Administration, Ohio Northern University.  This paper was published in Middle East Economic Survey, Vol XLVII, No 33, 16-Aug-2004.  In section two of the paper, Dr. Alhaiji wrote

Oil prices are at record levels only in dollar terms, but not in other currencies. Figure 1 illustrates the trend in daily oil prices in US dollars and euros since the introduction of the latter in 1999. It shows that while oil prices in dollars are near record levels, oil prices in euro are almost 25% lower than those that prevailed in the summer of 2000. Oil prices in dollars have been increasing since November 2003, while those in euros started to increase a few months later, in February 2004. However, oil prices in dollars have increased by 54%, while those in euros have increased by only 31%. 

Figure 1
Oil Prices in US Dollars and Euros (1999-2004)
(US oil prices are near record but oil prices in euro are still lower than the prices in 2000)

He also has similar graphs with the price of oil in dollars vs the pound and the yen.  A similar trend exists with these other currencies.  So devaluation of the dollar increases the price of oil, largely because other non-dollar economies are able to increase their demand as they receive more purchasing power.

To try to make this clear let me illustrate with this example.  I live in New York City.  Tourists from Europe are coming to New York and shopping like crazy.  Italians are coming here and buying Gucci because it is cheaper here than in Europe.  That is what I mean by purchasing power.  A similar example would be taking dollars to Mexico. 

Now to see the connection to the oil prices and the actions of the Fed watch this video on the growth of the money supply. 

Japan Looks Like Its Phillips Curve

Well this one definitely falls under the strange and unusual.  I found this on the Strange Maps blog, who found this on Marginal Revolution, a well known economics blog.  I love this!  It is not an exact match but the similarities are striking!

The Philip’s Curve is the relationship that exists between the inflation rate and unemployment rate.  Usually they are inversely related (which is a good thing), although the 1970’s showed us that both can happen at the same time.

How Bad Could It Get?

Will the recession be more like the 1990-’91 downturn or the Great Depression?
By James Ledbetter
Found on-line at: http://www.slate.com/id/2190516/pagenum/all/#page_start

I came across this article today and found it very thought provoking.  It outlines parameters of comparison illustrating the complexity of getting an answer to this question.  I would recommend it to anyone.

I don’t know why I am fascinated by the comparison of the current economic situation with other downturns.  It is almost like watching a train wreck.  Although I would never wish to have it happen, and feel for those who would be injured, I just can’t take my eyes off of it.  It’s very peculiar.  The parallels are shocking affirming that people don’t learn from history.