Wednesday, February 2, 2011

Engel's Law and Inflation: Food Prices Hurting The Poor

The above chart is from Business Insider it shows what percentage of the CPI is made up of food. The CPI is a measure of prices based on what the average consumer buys, economists call the things the average consumer buys a basket of goods (or basket for short). So an American basket would include some food, clothes, a house, a car, ect. an Indian basket would include a higher percentage of food, because Indians spend a higher percentage of their income on food. This is not surprising since we know the average Indian is poorer than the average American and poorer people spend a larger percentage of their budget on food. Economists refer to the relationship between the percentage of budget spent on food and income as Engel's Law (see the below chart)

h/t to Newmark's Door, which also asks why Argentina has such a high percentage given their relative wealth. I'm not sure why either, but my guess would be Argentines spend a larger percentage of their income on food then we would expect given their income, how else are you going to get all that beef.

Returning to yesterday's post my Dad asks for my cheap wine picks. Malbec is the way to go. Frontera can be found for $5. I also drink Yellow Tail (Australian)* and Rex Goliath (California) for their reds and Chateau Ste. Michelle (Washington) for Rieslings. Make a mixed case of these wines and it seems to go well.

* correction Yellow Tail is Australian, which should be easy to remember with the kangaroo on the label.
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