The Real Basket of Goods

I recently received the following from Ed Devol,

“When I try to educate people about the impact of inflation, I find putting it in terms of time worked for something is a good way of explaining inflation”.

 Thanks, Ed. I agree, when I am deciding whether to purchase something, I like to think of it in terms of how many hours I have to work to buy it. (It helps keep it “real”). In addition economists often link how many hours the average person has to work to eat. A poor country might require eight hours of work a day just to eat. While a rich country might require only 1 hour a day. So you might like the following article by Lynn Carpenter as she tracks prices and earnings over the last 60 years. And tells how many hours you have to work to buy a “weekend of food”. ~Tim McMahon, Editor

No Wonder They Called It Happy Days

By Lynn Carpenter

The best thing about investing… Well the money can be pretty nice… but the part I like most is how following an investment idea takes you into so many different worlds.

For instance, lately I was wondering how bad inflation really is… in a real-world historical sense. Which led to food costs, which led to grains and biofuels, which finally led to the $9 million giveaway. Shall we proceed?

The shocker in all this is the starting point… food costs.

Every time I go to the grocery store, I find prices are so outrageous I can’t help wondering what poor people do to feed themselves.

As it turns out, it’s not creeping old-fogeyism drawing over me. We have been enjoying a 60-year trend of low food prices that is crashing to an abrupt end this very year. Government statistics don’t begin to put the problem in its right perspective…

Nor does simply adjusting for inflation. The problem is affordability.

Here in the United States, as well as most of Europe, we are far from the food crises that have rocked Haiti, Pakistan, Mexico, Ivory Coast and a dozen other countries this year. But we are approaching a condition we had shed almost 60 years ago.

The government’s market basket-consumer price index figures always come up with numbers that never seem to reflect the price of groceries where I shop. And I don’t mean they aren’t buying their arugula at Whole Foods. I will even allow that I am likely to pick up the Pepperidge Farm bread and Boar’s Head bacon for my BLTs rather than the cheapest store brands. But still government numbers seem odd. Even with lower-quality choices, I can only conclude the shopper for the CPI numbers must be enjoying some kind of government discount. So I ran my own “market basket timeline.” You should know the results, because they are … no, I won’t use the word “shocking”. I’ll let you draw your own conclusions from the facts.

Here’s how I got my numbers. I made up my own market basket. Something a modest family might buy a hundred years ago that people still buy today. The basket consisted of a good weekend of meals, without fruits or vegetables: one loaf of bread, one pound of coffee, one dozen eggs, three pounds of mid-price beef, one box of Corn Flakes or Cheerios, five pounds of potatoes and one Hershey bar. All the sizes were adjusted to be consistent. Boy was that fun comparing the 1 3/8 ounce 1938 Hershey Bar to the many sizes that came after. I got the food prices from the extensive advertising archives of the Morristown, New Jersey Daily Record filled in with other city records where there were occasional gaps. That means the prices are good, low ones, not the highs. And the quality is mostly “store brand,” except for the cereal and candy.

But affordability has very little to do with the price of food. Affordability hinges on how much money you have to spend. So I tracked the grocery prices compared to the Federal Minimum Wage levels. And that makes all the difference in how things look.

Though you and I may be fortunate enough to make more than minimum wage, most wages are a multiple of the going rate. And viewed beside this most basic level of earning power, food is more expensive today than it has been any time since shortly after World War II.

In many ways, the story begins in 1960 because in the 1960s, my market basket cost a minimum wage earner just under 4 hours of labor (taxes not deducted). That was a turning point in our history that coincides with the huge rise in middle class living standards—a standard that is at risk of sliding downhill if the current trend continues.

We tend to look back at Depression era prices and think how cheap everything was. But in 1938, when the minimum wage law was first enacted, the rate was 25 cents an hour. The worker who made that had to work 9 ¼ hours to pay for my shopping list. At the bottom of the ladder, people literally worked for food.

In 1961, the minimum wage was up to $1.15, and the market basket took only 3 ¾ hours.

Food prices stayed around that range for years, even through the 1970s. After a long hyperinflation, prices finally rose enough to cause a minimum wage worker to labor 5 ½ hours to buy food in 1981, when the minimum wage was $3.35. That was a spike. The prices dropped back to the 4-hour range after that. And by 1991, when the minimum, wage rose to $4.25, my market basket was right back to 4 hours of minimum wage time.

Despite bouts of inflation, farm embargos, oil shocks and other forces, we have never again paid as much for food as we did in the 1930s and World War II years.

That is, until now. The market basket now takes 5 ½ hours to earn—the highest grocery cost since 1950.

Maybe we should stop burning corn.

This food cost investigation also makes me question the viability of big profits from restaurants that sell cheap meals.

But as to corn… let us leave the Corn Flakes for the flakiest outcome in the race to put biofuels in our tanks.

Respectfully,

Lynn Carpenter

This investment news is brought to you by Investor’s Daily Edge. Investor’s Daily Edge is a free daily investment newsletter that is delivered by email before the market opens. It’s published by Fourth Avenue Financial, a subsidiary of Early To Rise (an affiliate company of Agora Publishing). In each weekday issue you’ll receive practical strategies for protecting your portfolio and multiplying your money. You’ll also learn about undiscovered opportunities in emerging sectors and markets, deeply discounted stocks, recommendations for bonds, cash, commodity and real estate investing, and top ETFs.

 

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