Dealing with higher prices

How do people deal with higher food and fuel prices?  Here are some possibly interesting lessons on the price elasticity of demand from a recent Zogby poll:

Lesson 1:  The demand for food is highly inelastic because there are no substitutes--other than withering away.

...only about 8 percent of the 1076 respondents in the national poll said they were eating less generally to cope with rising food prices, the poll said.

Lesson 2:  The demand for gas is inelastic, but not as inelastic as the demand for food, because there are a few (uncomfortable) ways to adapt.

Nearly half of respondents to a Reuters/Zogby poll of likely voters in the presidential election later this year said they are driving less to compensate for record U.S. gasoline prices, which hit a record average of $3.80 per gallon on Tuesday according to travel club AAA..."People have more control over gasoline. They are driving less* and driving smarter," pollster John Zogby said by telephone.

Lesson 3:  The demand for specific types of food (that is, more expensive foods) is more elastic than the demand for food in general.  When prices rise, people will substitute cheaper foods for more expensive foods.

To cope with rising food prices, people are changing their habits but still eating about the same amount. Nearly 15 percent of respondents said they are eating less expensive foods. About the same amount said they are using coupons to cut costs.  Nearly 33 percent said they are absorbing higher food costs without any changes to their lives...

Lesson 4:  Walmart may provide complementary ways to adapt to high fuel and high food prices.

One result of both higher gasoline and food costs may be a rise in the future to more big box retailers like WalMart Stores Inc, which could offer consumers cheaper prices that they would burn less fuel to get to.

*Drive Less! is catching on!

Comments

[reason]

Nearly 33 percent said they are absorbing higher food costs without any changes to their lives...

They are lying. At the very least their net savings are less.

[reason]

Wrt... Walmart,
why does Walmart mean burning less fuel. I thought the presence of huge Walmart stores INCREASES the average distance that consumers have to drive. Many individual journeys more than offset more efficient logistics of the Big Box stores in terms of total energy use.

[Lou Grinzo]

People can drive less, or drive smarter:

http://drivesmarterchallenge.org/default.aspx

(Note: I'm not affiliated in any way with the above site. I'm merely a "hypermiler" who's saved a lot of money, consumed less gasoline, and reduced my CO2 emissions over the last few years.)

[DJ]

In my experience, WalMart means lower quality food, particularly for anything fresh. We don't buy meat or produce there, but we do find ourselves buying more canned goods and big lots (like 25 lbs of flour) there. Even though it may cost a bit more to drive to multiple stores, we find it worth the difference in quality.

We have reduced to cooking meat once a week as a way to cope with higher prices. But we still choose quality meat and produce over the cheap stuff-- if we're going to eat (and we are), it's going to taste good!

[Scott]

In my humble opinion, efficiency is far more important than driving less. I offer my example as evidence.

My driving habits have changed a bit, I avoid mid-day trips while at work, that change I estimate saved about 5%. I can reduce further. I plan to start biking to work part way (commute is 25 miles one way) more for health reasons than to save gas, but in any case it will reduce my annual mileage by about 8%. If I cut out all discretionary driving I could probably get a total reduction of about 25%, but with significant hardship.

I have been driving my Prius for six years now saving by my estimate about 4000 gallons of gas over my prior car and thus reduced my consumption by 60%.

My next car, assuming they make it to market will be an Aptera type 1h, which will save yet another estimated 2400 gallons over the next 6 years reducing my daily consumption of gas by a total of through increased efficiency alone by 96% without requiring any change in miles driven per year or change in lifestyle. That level of reduction would be impossible by driving less without both severe hardship and completely revamping my lifestyle (either a move or a change in job or both).

As noted earlier, at best simply driving less would have saved me about 25%. Thus I conclude that efficiency is capable of a far more powerful impact than is simply driving less. The above does not account for increased electricity consumption for recharging the Aptera, but that is somewhat hard to account for given that it is primarily at night against otherwise unused baseload capacity.

On a similar note, by the way, I installed solar 5 years ago; this generates 70% of my electricity. Between that and the Prius, I have reduced the family's C02 foot print by well over 50% with in essence zero lifestyle impact.

[John Mashey]

Regarding fuel elasticity, I'd observe there is:
a) personal transport, which has high elasticity
b) other, some of which has much less elasticity

EERE has a chart of oil use in transportation that is useful, as is a similar chart from US Senate ... neither of which seem to show much belief in Peak Oil.

1) Some of those categories seem pretty inelastic: if diesel prices go up, rail and heavy trucks raise their rates, and farmers must keep running combines. Airlines - we'll see, as they cannot replace fleets very fast, so they'll likely drop more less-used routes and raise prices.

2) In that chart, the awkward piece is the "light truck" category, given that it includes:
- pickup trucks used for business, personal transport, or both
- SUVs

The "business" part seems likely to be less elastic: if you need a pickup truck, or a combine, you can't use a bicycle.

3) Eyeballing that chart, it seems like 50-60% is autos and light trucks used for carrying passengers, i.e., for which hybrids and/or electrics can work [unlike Class 8 trucks, which seem pretty difficult], but of course, it takes a while, and there will be a lot of "stranded assets" sitting in used-car lots [or sold in Russia].

4) Does anybody have any good pointers to better versions of that chart? or elasticities in different categories?

My guess is: considering whatever part of price rises is from {huge demand growth in China+India, fuel subsidies in producers like Saudi Arabia, and Peak Oil], it sure looks like:

- fuel prices rise, people who need it pay, raising prices for (relatively inelastic) food and transport of goods.

- elastic consumer demand for personal transport gets squished pretty fast. Hybrids turn out to be good investments.

[John Thacker]

Too bad that the farm bill, among other things, increased the sugar price floor.

This blog claimed a little while back that US farm policy doesn't include explicit price targets. Not true, in the case of sugar. The program is a bit complicated (a loan using sugar as collateral that can be forfeited, valued at a guaranteed price), but it is a price floor.

[Tim Haab]

John,

I agree that it is an implicit price floor, but prices are no longer explicitly targeted. Probably semantics.

[BCO]

I have to agree - we need to drive more efficiently and immediately look for was to reduce our oil consumption. Based on 2006 data the US uses 20.59 million barrels of oil a day - where China the next biggest consumer only uses 7.+ million barrels a day. Remember China has a population of over a billion people. China and India are emerging economies and their fuel consumption will only increase.

The US has been spoiled - we have had low fuel prices for decades. While Europe has been paying more than 5.00 a gallon for years - we had gasoline that cost less than $2.00. As a result over the past 20 years the US chose to buy less and less fuel efficient vehicles and bigger houses. Even with the higher fuel prices our prices for gasoline is still less than most of the world. We were/are spoiled.

Now that speculation and demand have increased we are looking at everyone else to blame. We should start looking in the mirror.

I have suggested to Congress that we need to increase the incentives for high fuel mileage vehicles, add additional incentives for alternative fuel vehicles specifically hydrogen fuel cell, electric and more efficient hybrids. I have also suggested to Congress that they also need to immediately offer increased incentives for solar power and consumers who purchase alternative fuel electricity from their local providers. I don't think they listen though because they are too busy trying to figure out ways to sue OPEC