Consumer welfare effects of increased food and energy prices

In this study, the authors evaluated how much price changes in food and energy – two basic living expenditures competing for consumers’ budgets – would affect consumer welfare. We first estimated a US complete demand system to quantify the interdependent demand relationships among 11 categories of consumption expenditures. Among the estimates, the own price elasticities of both food and energy are relatively inelastic, a finding that explains the dynamics of the recent soaring food and energy prices. The estimated demand elasticities were then incorporated into the measurement of Hicksian compensating variation to analyse the consumer welfare effects of price changes in food and energy. The results indicated that an increase in food and energy prices would increase compensated expenditures or incur a substantial consumer welfare loss, creating an especially heavy burden for low income households.