Recently, there's been quite a bit of concern about rising food and energy costs, and worry that recent increases are signs of a coming outburst of inflation. While there's not much evidence that food and energy costs lead to higher inflation in the long-run, and hence no reason for the Fed to raise its target interest rate to prevent this from happening, that's not to say that increases in food and energy costs are inconsequential. For households in the lowest 20 percent of the income distribution, spending on food and energy is 44.1% of after-tax income:
The Cost of Food and Energy across Consumers, by Daniel Carroll, Economic Trends, FRB Cleveland: Rising food and energy prices have been getting considerable attention recently. The latest report from the Bureau of Labor Statistics shows that ... [e]nergy rose by 2.1 percent (7.3 percent year-over-year), which is consistent with its longer trend over the past six months. Curiously, given the focus it has received, the rise in food prices has been ... modest, just ... 1.8 percent year-over-year... In fact, food at home is up only 2.7 percent from its lowest point in the past two years. ...
The importance of food and energy prices to households' bottom lines is not evenly distributed across the income distribution... For the median household, food and energy are roughly 17 percent of both expenditures and after-tax income. Households in the top 20 percent of the income distribution spend 11.6 percent of total expenditures on food and energy, which adds up to 7.9 percent of disposable income. For the bottom 20 percent these shares rise to 20.4 percent of expenditures and a whopping 44.1 percent of after-tax income!
For those astutely wondering why food and energy expenditures are a larger fraction of total expenditures than of total income for the bottom 20 percent, there is a much higher fraction of households in this quintile which may be using savings and credit markets to consume above their annual income. Likely categories are the unemployed, business owners with temporary losses, students living on loans, and retirees drawing down their nest eggs.Perhaps this helps to explain why there's a close relationship between changes in energy prices and changes in consumer sentiment.