PracticalDad Price Index – September 2016:  The Potemkin Village Shelves

Another month of pricing for the PracticalDad Price Index is finished and the results for September, 2016 are calculated.  The Total Index, comprising the full 47 item market-basket, declined in September to 98.28 from August’s 100.19, a full 1.91 basis points (November 2010 = 100).  The 37 item Food-only Sub-Index, comprising the 37 foodstuff items within the basket, dropped even more significantly from August; the September Sub-Index was 97.26, down 2.48 basis points from August’s index of 99.74 (November 2010 = 100).  This is one of the largest swings in either direction in the almost six year history of the PracticalDad Price Index.

Here’s a little perspective.  I began the Index in November 2010, in the midst of the Fed’s QE2 Program and both Index and Sub-Index climbed until they peaked in January 2015 (111.32) and December 2014 (115.13) respectively.  This was shortly after QE3 ended in late October 2014.  It took more than four years to induce these apogees but without the stimulus provided by the Fed’s programs however, deflation has ground away and the both Indices have literally collapsed.  The cost of the full market-basket was actually less in June 2016 than at the outset of the project and the food-stuffs segment likewise reached that point in July 2016, a month later.

One of the things that I’ve noticed while pricing for the past several months has been the quantity of items on the shelves and by extension, the condition of the grocery supply chain.  This is in terms both of the seeming appearance of more widely spaced shelves and also the periodic disappearance of items from the shelves completely.  It’s not like the photos of desolate shelves pre-hurricane or even the absolute disappearance of product a la 2016 Venezuela, but it’s little things.  A particular item will be gone for a month or two – not just unstocked but with even the shelf label gone – only to reappear later; in multiple instances, the item has not only returned but been supplemented by an even lower-cost alternative, what economists refer to as an inferior good.  When this has shown to be consistent in the subsequent months, I have have made note and replaced the store-brand with the inferior item in the index pricing.  Also noticed has been wider shelf spacing between products in particular grocery departments (health and beauty, cereal, hot dog cases).  If you’re willing to make the effort, check occasionally for empty space behind the front two rows of products, which might have been moved forward to the very front of the shelf to make it appear more well-stocked.  This Potemkin-Village effect is a wonderful metaphor for what’s become of the American economy as the media touts the stock market but the large majority of Americans grow poorer.  But it was a recent article about the effects of deflation upon the grocery supply chain at zerohedge that confirmed what I’ve noticed.  As prices have collapsed, the entities at the various levels throughout the supply chain are scrambling to adjust and companies are either surviving or dying and it’s the indications of this that are being exhibited subtly in the grocery aisles.

PracticalDad Price Index – August 2016

PracticalDad note:  The process of writing in the past year has slowed appreciably and has actually come to a stop within the past three months.  There are certainly still things to be written because the situations, observations and conversations with the kids have continued nonetheless, but the process of being sandwiched has risen to impressive levels.  But it is beginning to resolve and my hope is that life will right itself enough that I can get back to this.  That said, I at least managed to get the pricing for the Price Index done.

The prices for the August 2016 edition of the PracticalDad Price Index have been noted and the results calculated and they are, as they were in July, continuing to bounce around at the levels they were when the Index began in November 2010.  The full marketbasket of 47 items actually rose over half a point in August to 100.19 from July’s result of 99.51 (November 2010 = 100) while the 37 item foodstuff only Sub-Index rose almost three quarters of a basis point to 99.74 from July’s result of 99.01 (again, November 2010 = 100).  Certainly there are items that are more expensive than they were at the outset of the project almost six years ago, but enough items have been offset enough in prices to actually bring the average cost of the marketbasket back to a point at which it stood back in November of 2010.

What is notable about this month? 

  • There is yet another product that is being dropped from the shelves by grocers because it apparently doesn’t generate enough revenue to justify its continuance on the shelves.  This store-brand item is still available at a single grocer but even that item was noted to have undergone stealth inflation as the container size dropped from 12.8 ounces to 12 ounces.
  • There continue to be instances in which the shelving is empty at different parts of the store.  There were several instances this month in which the sampled items were absent from the shelves and it was only by locating the shelf label that I could verify whether or not it continued to be even offered.
  • There is yet another instance of stealth deflation as one of the grocers returned it’s packaging to the original size.  The cost is higher than it was with the smaller packaging, but on a per-ounce, price-adjusted basis, it is less expensive.
  • PracticalDad Price Index – July 2016:  Confirming Deflation

    It used to be that you could get a candy bar for a nickel.  Then a year later, you could get three candy bars for a dime.  A year after that, nobody had a dime.

             – explanatory comment about deflation by ‘Dryfly’ to the writer in the comment thread of Calculated Risk, circa 2008

    The prices for the PracticalDad Price Index grocery basket have been collected from the three separate and unrelated grocers and the results continue to confirm deflation and the failure of the Quantitative Easing programs to spark moderated inflation.  The Total Index of the 47 item basket dropped again, this time to 99.51 from June’s 99.90 (November 2010 = 100); the 37 Food-Only Sub-index (the 37 foodstuff items such as dairy, meats, etc) likewise dropped from June’s 100.24 to this month’s level of 99.01 (again, November 2010 = 100).  The upshot?  Although the aggregate cost of the full basket was actually less than at the project’s outset in November, 2010, the aggregate cost of the 37 foodstuff items within the basket was still slightly higher.  As of this month’s result however, that Sub-index is now likewise lower than at the project’s outset in November, 2010.  So yes, hamburger will still cost more than almost six years ago, but there have been enough changes in other items to offset that and lower the aggregate cost.

    You’d say that prices have actually decreased, which is seemingly a good thing.  It’s supposedly what we want, with prices stable or even a little lower so that we can get more for our dollar.  But it really isn’t all that it’s cracked up to be and the opening comment from Dryfly – the nom de blog of an exceptionally astute individual – illustrates why.  Prices for items can go up and down for different reasons, but the largest reason for the prices of everyday items to rise and fall is the aggregate amount of money coursing through the economy.  When there is sufficient money flowing through, normally through family income, people are willing to spend and the price of a particular item is usually the point at which buyers and sellers agree that a sale should occur.  It used to be that you could get a candy bar for a nickel.  But if the underlying money supply begins to diminish, buyers become more cautious about how they spend their money and sellers have to work harder to persuade buyers to spend their money.  Then a year later, you could get three candy bars for a dime.  In a truly deflationary economy however, the money supply held by the public is so low that people simply have no money or refuse to spend what little they have and the sellers simply go out of business.  A year after that, nobody had a dime.  The unspoken phrase in this brief sentence is that there was nobody around to sell a candy bar, either.  This was the Great Depression of 1929 in a nutshell and it’s not for nothing that Ben Bernanke was selected to replace Alan Greenspan as chair of the Federal Reserve since Bernanke’s theses had been about the then-Fed’s errors in responding to the Depression.  People lost their money and businesses lost control of prices as they engaged in bare-knuckle behavior in order to stay in business and more often than not, they went bankrupt.

    So this new monthly Index level isn’t as good of a thing as the Fed would like to see.  It continues to illustrate the effect of the family’s loss of income; for the average family, not only is their income less, but they are now forced to contend with competing demands for their income as other costs are off-loaded by corporations and the government onto their narrow shoulders.  It also says something that despite the efforts of a central bank to inject trillions of dollars into the economy, so little has been accomplished for the family while so much has been accomplished for the uber-wealthy, the .01%.  The grocers are taking multiple approaches to both maintain sales and keep things affordable for the consumer:

  • They are keeping meat prices within reach by starting to contract with high volume meatpackers who sell their products in chubs.
  • They are now including what economists refer to as inferior goods, i.e. items that are cheaper substitutes that wouldn’t be purchased when incomes were more flush.  When I began this project, the most affordable alternative on the store shelf was the generic store brand and the inferior good alternatives were available only at discount grocery stores where the majority of the population doesn’t shop.  But the grocers are now starting to introduce these labels into their own stores so that the store-brand products become the mid-line alternatives.
  • They have always paid attention to the profitability of items on their shelves but now instead of dropping individual brands, they are dropping entire products from any producer so that the consumer no longer has that option within that store.  The logistics of the survey are that I visit the same three stores each month and price the 47 marketbasket items within each for a total of 141 items cumulatively.  Already, I have to account for the fact that two of the three stores no longer even stock one of the original items and that particular item is now dependent solely upon the remaining store for inclusion; if that store were to drop the item, I would end the survey.  This month, two separate grocers each discontinued carrying a single item and that leaves me with two more of the 141 now missing.  I have given thought to discontinuing the project if it reaches a point that so many of the original items are missing that the validity is threatened but it’s not enough of a factor yet that it’s in the cards.  Of course, if it does reach that point that too many of these common grocery items are missing from the store shelves, then it’s moot because we’re going to have far bigger fish to fry instead.
  • The grocers are decreasing their overall inventory and placing less on the shelves.  I’d noticed in the past year that shelf spacing was becoming erratic and in the past several months have purposefully paid attention to the appearance of the shelves.  What I’ve seen is that the grocers do seem to be increasing the empty space between products although I haven’t gone in with a ruler to measure them.  In the case of one grocer, there’s an appreciable difference in the shelf area for non-food personal care items such as shampoos and in another, in the cereal aisle.
  • The grocers have periodically changed their package sizing to meet the situation.  When the QE programs were in effect and commodity prices were rising, products underwent stealth inflation as prices remained the same yet the package sizing decreased so that the net effect was an increase in price for that item had the sizing remained the same.  What I’ve begun to see is the reverse, stealth deflation, as the package sizing is actually increasing with either no change in price or only a moderate increase that reflects an actual price drop in the item.  This has happened several times with store-brand coffee and most recently with the Suave Shampoo brand, which replaced the 22.5 ounce container with a 30 ounce bottle.  In the case of the shampoo, the price changes have not been high enough and when the pricing is recalculated to the original size bottle, the effect is a per ounce price cut.
  • The grocers are also finding ways to mass their purchasing power and force concessions from the producers.  The one grocer is owned by an international firm and I can see how they’re exerting their buying power on the producers as they’re simply cutting prices on more and more items.  There is also the likelihood that they’re driving things down purposefully in order to overwhelm and outlast their smaller competitors; yet the reality is that the prices on similar items are being cut in the other grocers as well.
  • The takeaway is this.  These changes aren’t occurring because the grocers and producers are being kind to stretched consumers.  They’re happening because the grocers have to find a way to maintain sales in a population in which the money increasingly just isn’t there.  And that is deflation.

    And now for the past six months of results.  Note:  There was an error in last month’s table for the June results and I have corrected this in this table.  The correct figures were reported in last month’s text but the numbers were listed incorrectly in the table.  This did not, however, alter the fact that the Total Index for June 2016 did breach the original index floor of 100 for that month.

     

    PracticalDad Price Index – July 2016
    Month Total Index Food-Only Index Spread
    7/16 99.51 99.01 (.5)
    6/16 99.90 100.24 .34
    5/16 100.66 101.60 .94
    4/16 101.64 101.40 (.24)
    3/16 102.86 102.85 (.01)
    2/16 103.86 104.27 .41

    PracticalDad Price Index – June 2016:  We Just Broke the Buck

    The PracticalDad Price Index for June 2016 is completed and calculated and the results are simple.  The Total Index of a market basket consisting of 47 grocery store items again lost ground from the previous month and broke the buck, actually declining to a level below its initial start point in November 2010.  The June 2016 Total Index declined to 99.90 (November 2010 = 100) from May’s near-zero reading of 100.66.  The Food-Only Sub-index of 37 foodstuff items within the same marketbasket likewise lost ground from May’s level of 101.60 to this June’s reading of 100.24 (November 2010 = 100).

    What precisely does that mean?  Simple:  It now officially costs less to buy the market basket of 47 grocery items than it did at the beginning of the survey in November 2010.  So much for Quantitative Easing.

    What does it mean to break the buck?  The term comes from the money market group of mutual funds and refers to the scenario that all money market managers try desperately to avoid – when the Net Asset Value of their fund’s actual investments decreases below the $1 per share floor.  Understand that money market funds are considered to be the safest investments around since they invest their proceeds in extremely short term debt instruments, which are of such short duration that they are considered ultra-safe.  But while safe, money market funds aren’t insured by the FDIC so the managers work assiduously to ensure that their share Net Asset Values don’t break the buck and breach the $1 floor, an event with signficant psychological impact upon the fund-holders.  The last time that a fund did so was in 2008, at the height of the financial crisis and the government actually created a fund to insure and stabilize that market.  As I sat and reviewed the results, it seemed to be an appropriate term that’s applicable to situation.  The Fed’s intent with the multiple Quantitative Easing Programs was to invoke inflationary pressures and so long as they could inject liquidity into the system, it managed to create a modicum of steam to drive inflation.  But the ending of QE 3 in late October of 2014 doused the boilers and brought a deflationary return that commenced within only two months and has continued almost continuously since then.  What it took the Fed to accomplish in 49 months – with some help from real supply/demand issues in beef and dairy – has been simply reversed back to, and beyond, the original point in only 18 months.  The Fed must indeed feel like that 2008 Fund manager as they too, break the buck to a point where they don’t wish to be.

    And now for the past six months of results.

     

    Month Total Index Food-Only Index Spread
    6/16 99.82 100.07 .25
    5/16 100.66 101.60 .94
    4/16 101.64 101.40 (.24)
    3/16 102.86 102.85 (.01)
    2/16 103.86 104.27 .41
    1/16 104.54 105.25 .71

    PracticalDad Price Index – May 2016:  Start Watching the Shelves

    Deflation reigns.

    The May installment of the PracticalDad Price Index is now ready, prices for the 47 item marketbasket gathered at three unrelated grocers, averaged and calculated.  The result?  Deflation continues as the Total Index dropped from April’s level of 101.64 to a current level in May 2016 of 100.66 (November 2010 = 100), a decrease of almost a full basis point.  When I remove the ten non-food items, the remaining 37 item Food-Only Index did increase marginally from April’s 101.40 to May’s 101.60 (November 2010 = 100).  This month’s Total Index drop was fueled by one grocer’s decision to drop the cost of a package of Enfamil formula and another’s decision to significantly drop the price of both adult and children’s store-brand ibuprofen.  Magnify these types of decisions by the untold number of prices that are on the shelves of grocers across the United States and you have a sense of what’s occurring.

    There is another significant difference this month and that pertains to what I’ve noticed as to the inventory levels maintained by the grocers.  There have been occasional blurbs noted online – and I can’t verify where I’ve read them – about what might be going on with the inventory levels at retailers as people might have noticed that clothing racks suddenly appear to be more widely spaced apart than they might have been in a previous visit several months before.  Because the PracticalDad Price Index is a monitor of grocery prices instead of inventory levels, I haven’t paid explicit attention to what’s happening with the product inventory.  It’s something that I’ve begun to notice within the past years in a huh… fashion as shelves might appear to have fewer of the item in stock than previously or even missing it completely, leaving me to work with the shelving label.  But I was taken aback this month to see entire gaps in the frozen food section of one grocer as multiple products were missing in entirety from the case – and the shelves were still labelled for those products.  This observation raised a mental concern and that concern was confirmed when I visited another grocer to find a perceptible difference in the quantity of products on the shelves of the health/beauty aisle.  In this particular store, there was the typical variety of health/beauty products for sale but in far less quantity than I ever recalled seeing previously; there would be handful of an item but it would be set back against the back of the shelf and the front part of the shelf would be completely empty.  Magnify this across an entire spectrum of products in the health/beauty section and it appeared utterly barren.  When I continued through that particular store, I began to note other areas in which the product line appeared to be well-stocked but only because the amount on the shelves had been moved forward but there was very little behind it.  In other words, there was no product in depth on the shelving as I’d seen in previous months or years.

    So what is the upshot?  As family incomes continue to decline and the middle-class American is stretched, this economic emaciation is beginning to move through the greater economy as grocers now appear to be far more actively culling their inventory levels to maintain their margins and profitability.  I’ve already noted that a grocer might opt to no longer carry a product because it simply isn’t profitable – two of the three grocers no longer carry cases of size 3 store-brand diapers, for example – but this is now moving beyond the individual product choice to a broader spectrum.  So when you next walk through the aisles, looking at the shelves and have a huh… moment, there’s a decent chance that it isn’t just you.

    PracticalDad Price Index – April 2016:  The Failure of QE

    Frequently, compiling the monthly PracticalDad Price Index is less than exciting – have you ever wondered how stupid you must look when you’re on your knees checking a shelf label six inches from the floor? – and the results can be dull.  But there are times when it is exciting, and the past number of months are a case in point.  Last evening’s final calculation for April led to an audible sonuvabitch as I considered the number on the spreadsheet.  The Total Index result for the 47 item marketbasket dropped by more than a full basis point to an April level of 101.64 while the 37 foodstuff item Food-Only Sub-index declined by almost one and a half basis points to an April level of 101.40.  What does this mean?  It means that everything that the Federal Reserve has tried to achieve with three rounds of Quantitative Easing, the trillions of dollars added to the money supply and their own balance sheet in an effort to spur inflation, is being utterly wiped away in abject failure.  Unless, of course, you’re a hedge fund manager with assets in the market. 

    The 47 item grocery marketbasket index began in November 2010 with a baseline index of 100 and through QE programs 2 and 3, the programs were able to induce a degree of mild inflation to offset the dread deflation.  But QE 3 ended at the end of October, 2014 and the 37 item foodstuff sub-index subsequently peaked in December, 2014 – only a month later – with a sub-index reading of 115.13 (again, November 2010 = 100).  To purchase the same 37 foodstuff items more than four years after the outset of the Index would have cost 15.33% more at the peak.  And now?  Less than a year and a half later, with no QE, that has been almost wiped away and the indices are once again back where they were in the first quarter of 2011, only months after the start of QE 2. 

    Take note of one particular element of the data listed below.  The final column is labelled Spread and is literally the differential between the Total Index and Food-Only Subindex results.  For me, it’s an indication of where the activity within the marketbasket is taking place, whether the 37 foodstuff items alone (for a breakdown of the items surveyed, see here) or whether there’s more effect among the ten non-foodstuff items such as soap, ibuprofen or trash bags.  What I’ve come to find is that the foodstuff segment of the Index is more sensitive to factors than the more stable 10 item non-foodstuff segment.  Most of the rise in the Index has been fed by this more sensitive foodstuff segment and during the last months of the QE 3 program, the spread between the two was at times greater than three basis points with the Food-Only Subindex leading.  But this month is only the third time in more than 65 months of consistent pricing that the Subindex trails; food led the way as an inflationary indicator and now it leads the way as a deflationary indicator. 

    It shouldn’t have been a surprise since the first part of the week brought a mailer from one of the surveyed supermarkets, which touted Thousands More Prices Just Dropped.  This market, along with the two surveyed competitors, have taken multiple steps in the past year to adjust to the economic environment of increased food stamp usage and diminished family incomes.  New suppliers have been found for their store brand offerings and cut-rate products are now sitting on the shelves for the price-conscious.  Yes, meat is still higher than it was at the outset years ago, but that kind of supply/demand imbalance brought about by decades-low herd sizes doesn’t end even remotely overnight.  It can be mitigated by factory techniques brought to the meatpacking industry and this is happening as more stores are now selling their 80% lean ground in factory-packed plastic tubes called chubs.  Yes, more temporary supply dislocations brought about by factors such as avian flu can arise, but these resolve more quickly and the products, especially eggs, are lower in price than they were.  Yes, commodities such as sugar and coffee have suffered stealth inflation so that they’re now sold in smaller containers, but even their prices have ebbed from their previous highs as the hot money of QE has ended.  But the problem of the diminished family income, further weighted by new claims upon it by higher education and healthcare costs, isn’t so easily treated.  So the grocers do everything within their power to make their products more affordable so that they can compete and this bareknuckle price competition is symptomatic of deflation…brought about by a smaller money supply amongst the general public.

    Which is perversely fascinating given all of the money that’s been created by the Federal Reserve since the initial Quantitative Easing attempt began more than seven years ago.

    This little datapoint of the prices at three unrelated grocery stores is fully related to the much larger issues being revealed by the chaos of the 2016 Presidential Electoral Process.  Massive amounts of money have been created out of whole cloth yet so little is reaching the general public that true deflation is being exhibited by the pricing and production behaviors of the grocers, as close to the first line of consumer spending as any line of business on the planet.  It’s this political anger, fueled by unpopular trade policies and protracted military engagements that remove living-wage jobs and detract from important public investment, that gives literal rise to the figurative middle fingers of both left and right of the political spectrum to the establishment mandarins.  Make no mistake about it, the anger from both sides is coming together as the divides are two sides of the same coin with the common element of anger directed at this government/corporate beast that we’ve allowed to be created.

    So what happens to the prices going forward?  While my guess is as good as anyone else’s, the bet is that they’ll continue to decline.  Some items are more expensive than they were five and a half years ago, but there will be enough offset elsewhere that the cost of purchasing a marketbasket of the same items will actually be cheaper than they were at the outset.  Unless they either re-institute another round of QE – which would be disastrous without fundamental changes to the existing system that’s already created such divisions of wealth and class – or find a way to promote the creation of sustainable, living wage jobs, then the hemorrhaging and deflation will continue.  So, here are the indices for the past six months.

     

    PracticalDad Price Index – April 2016
    Month Total Index Food-Only Index Spread
    4/16 101.64 101.40 (.24)
    3/16 102.86 102.85 (.01)
    2/16 103.86 104.27 .41
    1/16 104.54 105.25 .71
    12/15 104.92 106.39 1.47
    11/15 104.79 105.97 1.18

    PracticalDad Price Index – March 2016:  The Human Face of Deflation

    The data is collected and calculated for the March 2016 edition of the PracticalDad Price Index and once again, the Index has declined as deflation now roars through the grocery stores.  The PracticalDad Index marketbasket consists of 47 items from a standard grocery store that are commonly purchased by a family on a budget.  These items compose the Total Index and for March 2016, the Total Index for this marketbasket was 102.86 (November 2010 = 100.00) and was down a full basis point from February’s level of 103.86.  The Food-Only Subindex is composed of the 37 foodstuff items within the basket and in March was actually less, at 102.85 (November 2010 = 100.00) and declined by a considerable 1.42 basis points from February’s Subindex reading of 104.27. 

    Let’s put this into perspective.  The PracticalDad Price Index began in November 2010 as a kitchen-table project to ascertain what was actually happening to food prices on a family level.  The Federal Reserve had commenced the first of three efforts at Quantitative Easing, an untried and novel approach to kickstart economic activity by flooding the financial system with liquidity.  The QE programs were the brainchild of the then-chairman Ben Bernanke, an economics professor whose academic expertise lay in the errors of his Great Depression era predecessors in the effort to fend off the deflation that laid waste to the global economy.  It was only natural that such an untried policy approach gave rise to immense debate over it’s ultimate impact and whether it would fail, create the unicorn-like moderated inflation of 2% or tear the economy a new one that spewed a raging storm of inflation.  Yeah, good times…  But for all of the conversation about isolated items rising or falling in price, or the closely followed CPI, how would this play out in the marketbasket composed of items purchased by the common American family?  And so the PracticalDad Price Index was born. 

    So in five years and trillions of dollars created and injected into the Financial system by the Federal Reserve via three separate QE programs, what has been the result?  From the period of November 2010 to November 2015, the Federal Reserve more than doubled the asset holdings on its balance sheet, seeing an increase from approximately $3 Trillion to $7 Trillion while the DJIA during the period of November 2010 to March 2016 rose by 60%, from 11124 to 17829.  The gap between the uber-wealthy and the average American increased in terms of amount of assets owned by the top .1% – that’s top one-tenth – now equals that owned by the bottom 90%.  So Ferrari and other luxury car firms sold more, and the prices taken by collector’s artwork at auction increased as well.  But that’s on the upper end of the spectrum.

    What’s happened on the lower end of the spectrum is a far, far different thing.  By 2014, the most recent year for which Census Bureau figures for median household income are available, the median household income was 6.5% lower than the same category in 2007 ($53,657 vs $57,357), the last year prior to the Financial Crisis.  The number of Americans receiving SNAP benefits rose from 44 Million in December, 2010 to 45.4 Million in November, 2015.  This is the human face of deflation:  deflation isn’t just prices mechanistically declining on a grocery-basket basis, it’s the result of thousands of grocers and suppliers working to maintain sales and profitability in the face of lower incomes, competing demands and increased hunger amongst millions.  Deflation occurs by substituting lower priced brands of food from cheaper suppliers across a broad range of foodstuffs.  And if the quality has to suffer, so be it.  Deflation is not a sudden event but instead a steady grind as economic pressures sand down incomes with the result that the suppliers and producers have no choice but to lower their prices so as to maintain sales and hopefully, profitability.

    When economists talk about inflation and deflation, it’s treated much as any other abstract principal and the essential humanity behind them is lost.  When I finally saw The Big Short with Middle the other week, I noted the scene in which two young hedge fund managers are in Las Vegas and break into celebration when they find that their mentor, Ben Rickert (Brad Pitt), has been able to secure the credit default swaps that will – hopefully – pay off massively when the housing market breaks.  But Rickert simply stares at them and reminds them that for all of the statistics, there are people who will suffer.  Lost homes and bankruptcies, broken families and dislocation, and the two become more grave at the reality.  And so it is with deflation.  Prices will fall, but there is a cost to it.  The human face of deflation within the PracticalDad Price Index is one of hunger and quiet desperation.  It is the face of millions of Americans requiring government assistance to put food on their tables.  It is the face of the Food Bank manager who has to once again search out donors to help replenish the shelves for those in need.  It is the face of the elementary school student who receives a backpack each Friday afternoon during the school year, filled with enough food to sustain her through the course of the weekend until she returns to school and a free lunch the following Monday.  It is in the face of the elder who has to choose whether to spend precious funds on food or medication.  It is the face of the Boy Scout who participates in an annual national food drive to replenish food banks, and whose family is possibly going to have to utilize that food in another week.

    This project began out of an intellectual interest in what was occurring on a policy level.  But maintaining it for the past five years – following the same 47 items – has become more than an intellectual exercise.  It has brought an awareness of the faces within those stores and with that, a frank anger at the hubris and detachment of so many of the political and financial elite.  Listen to what is being said and the manner in which it is presented.  But most importantly, try to move beyond the language and see the effects upon the humanity which will ultimately feel the impact of the proposals.  This affects our neighbors, co-workers and classmates.  This affects us and most importantly, it affects our children.  Because God forbid that the face of the youngster looking at the stark choice is our own child.

    PracticalDad Price Index – February 2016:  Bare-Knuckle Price Fighting…

    The pricing for the February 2016 edition of the PracticalDad Price Index is in with deflation in the 47 item grocery market-basket continuing.  As I sat there researching background information to understand something, it occurred that what we’re watching in the retail economy is best described as bare knuckled price fighting.  There was a time when grocery stores were adding upscale coffee kiosks and organic produce sections to entice customers, but that’s now in the past as stores are finding new ways to fight for the disappearing consumer dollar and it’s creating a feedback loop for deflation.  But first, the numbers from this most recent monthly pricing and then some comments both about what I’m seeing on the shelves and how this is impacting the Index.

    The Total Index reading on the 47 item PracticalDad Price Index for February 2016 came in at 103.86 (November 2010 = 100), down from January’s 104.54.  The 37 food-stuff components sub-index for February was 104.27 (November 2010 = 100), likewise down almost a full basis point from January’s result of 105.25.  For the Food-only Subindex, this most recent result of 104.27 is fully 70% less than the high-point of that sub-index; it reached a maximum of 115.13 in December 2014 and has declined since that time. 

    So there you have it.  More than a half decade of artificially low rates pushing the zero-rate boundary to spur inflation and all of those trillions of dollars of additional liquidity wiped away in the fourteen months since that peak.  Fourteen months and the aggregate pricing is now back at a level unseen since the summer of 2011.  A pound of hamburger and a package of hot dogs are still more expensive than at the outset of the survey in November 2010, as are some other food items, but it’s what has occurred with other items that provide a good explanation of deflation and what’s occurring within the greater economy.

    What’s accounting for the ongoing deflation?  Simply put, the grocers are doing everything that they can to fight for the average family’s disappearing dollar – understand that one in seven Americans is now receiving government food assistance – and this consists principally of rolling out new products that cost less to produce, the lowest common denominator approach.  I’ve noticed this within the past year as two of the three surveyed grocers – each part of a separate grocery chain – established new pricing policies that moved towards low prices on store-brand products.  The third grocer is an independent whose store-brand within the past year has been completely replaced by another supplier with an across-the-board reduction in the price of each item surveyed.  But what has happened within the past several months is that one of the grocery chains is now in the process of supplementing its store-brand product line with another line of products that are offered by a grocery industry GPO (Group Purchasing Organization).  The savings on the products are significant; in the case of a can of vegetables, by a full 40% (from $.79/can to $.47/can) and this is being played out among other products within the basket.  It’s also led to a mental debate on whether and how to account for this shifting in the PracticalDad Index.

    When the concept for the Index arose in 2010, the pricing was based whenever possible upon the lowest prices for the items and these were, in all instances, the store-brand (generic) lines of products.  Name-brand items were only used when the lower-cost store-brands weren’t available in all of the stores.  These lower priced alternatives to the store-brands simply didn’t exist in the products and it’s only within the past few months that this has fed into multiple products.  Should I account for them or not?  Given that the baseline premise for the survey was a marketbasket of grocery items being purchased by a family with children living within an alloted monthly food budget, I opted to account for the product shift as these items would be purchased by the budget-conscious family in lieu of the now more-expensive store-brand items.  These products aren’t going away and the question that I have, based upon what I’ve seen in one of the chain’s stores, is whether it will actually be the store-brand items going away instead.

    I mentioned the term GPO in a previous paragraph and it’s useful to explain what that is.  A Group Purchasing Organization is actually an old concept now brought to the grocery industry.  The first GPO was started in 1910 by the New York Bureau of Hospitals and centralized purchasing of medical items for a number of hospitals in order to maximize buying power and gain price concessions from manufacturers.  This has long since caught on amongst other industries and holds true for the grocery industry as well.  What the Index now reflects is that one of the surveyed grocers now offers the low-end brand created and marketed by a GPO named Topco Associates, LLC.  This GPO is a privately held concern consisting of more than 50 separate grocery retail chains across the country with aggregate revenues in the billions of dollars and the organization uses this buying heft akin to that used by Walmart to gain concessions from food producers.  As I researched the concept of GPO for this article, I came across an online ad touting Do you want to be like Walmart?  The Walmartization of the American economy continues and I wonder where it will end.  As I write this, to my left is an orange can of low-cost coffee now offered by the other grocery chain as a supplemental choice to it’s own store-brand coffee and I surmise that it’s from yet another GPO (as yet to be determined).  And as you’d expect, it’s not good.

    And now for the past six months of results.

     

    PracticalDad Price Index – February 2016
    Month Total Index Food-Only Index Spread
    2/16 103.86 104.27 .41
    1/16 104.54 105.25 .71
    12/15 104.92 106.39 1.47
    11/15 104.79 105.97 1.18
    10/15 106.17 107.07 .9
    9/15 105.21 107.12 1.91

    PracticalDad Price Index – January 2016:  Welcome to the Jungle

    The pricing for the 47 item PracticalDad Price Index marketbasket is complete and after looking at the results, the one phrase that crossed my mind is welcome to the jungle.  The changes that I’m seeing from one month to the next are symptomatic of what’s occurring in the larger economy in multiple ways.

    In terms of pure numbers, the 47 item January 2016 PracticalDad Price Index declined from December’s 104.92 to January’s 104.54 (November 2010 = 100) while the 37 Food-Only Subindex dropped more than a full basis point from December’s 106.39 to January’s 105.25 (November 2010 = 100).  Please note that for the Food-Only Subindex, the cumulative decline from the December 2014 apex of 115.13 is now greater than 65%; it took more than four years of quantitative easing and loose monetary policy to bring that subindex for the 37 item foodstuff item marketbasket up by more than 15%.  With the cease of QE and persistent economic pressure upon the family, it’s only taken 13 months to undo it.

    So how is this akin to a jungle?  You have to understand why the three store average dropped as much as it did in one month – unbelievably (to me, at least), the cost of a pound of 80% lean ground beef actually dropped by an average of 5.4%.  If you’re going to store or watching the news, you’d be in company with me at this drop.  But what was surprising – and informative – was the cause for the decline. All of the surveyed stores sold their 80% lean beef in store wrapped packages but last week, two of the three – each a part of a chain – were selling their 80% in a large, pill-shaped package called a chub instead of the usual packaging.  I’d seen the chubs before, but they had always been for the lower margin/higher fat 73% lean and because they were not part of the survey, I’d simply ignored them.  When the numbers were tabulated and the indices found, I decided to go back to the two stores to examine the beef further.  Each of the chubs, now sold in the two chains, were produced by a firm called JBS LLC, USA; this is the American subsidiary of a Brazilian multinational meat packing firm founded in Brazil in 1953.  As I perused further, I saw that JBS had done a serious job of growth via acquisition of firms both in the US and elsewhere.  They have diversified first across types of protein so that they now produce poultry as well as beef and they’ve diversified vertically by the purchase of massive feedlot operations used to fatten cattle prior to slaughter; in 2008, they purchased Five Rivers Cattle Feeding to make them the largest cattle feeder in the world.  They further extended their control by the 2010 purchase of the McElhaney Feedlot in Arizona, which increased their cattle feeding capacity by more than 130,000 head at one time.  So the producer of the chub is a massive presence in the beef production industry.

    What scares the central banks about deflation is that during the Great Depression, money became so scarce that many companies lost control of their ability to set and maintain prices, resulting in their ultimate bankruptcies.  Competition amongst producers simply came down to which could survive long enough, a truly dog eat dog scenario.  This is eerily reminiscent as money continues to flow out of the middle class and budgeted food dollars are replaced only partially by government food stamp programs, placing greater pressure on the grocers and by extension, the producers.  As the preceding information about JBS SA shows, this is a firm that’s built for survival via sheer economies of scale.  What’s also notable about this change in the offering of 80% lean is that the chub is now the package offering for a higher grade of ground beef.  If you accept the proposition that the lower and fattier grades of beef are the province of those with less money, then a shift in packaging to the chub by a mass producer is an indication that the extent of the family budget woes are creeping throughout the middle class.  Obviously, executives at the grocery chains are noticing drops in sales and are aware of why and rolling out a lower priced alternative is the logical response.  However, this is not the kind of indicator that you want to see. 

    The jungle metaphor also refers back to one of the great impact novels of the early 20th century, Upton Sinclair’s The Jungle.  Sinclair’s book was a work that exposed the conditions of the meat-packing industry of that period and by extension, the conditions that prevailed overall when businesses were able to operate without any form of oversight to enforce the most basic sanitary conditions.  It helped to establish the mindset that there was a legitimate role for government in the regulation of heretofore laissez faire competition.  One of the later upshots of this was the establishment of the Food and Drug Administration to oversee the safety of what goes on the table.  This isn’t to necessarily say that the packing conditions are horrible and the product tainted, but when businesses get to the size that meat production is akin to factory conditions, then it does make me wonder.

    And now to the results of the Indices for the past six months.

     

    PracticalDad Price Index: January, 2016
    Month Total Index Food-Only Index Spread
    1/16 104.54 105.25 .71
    12/15 104.92 106.39 1.47
    11/15 104.79 105.97 1.18
    10/15 106.17 107.07 .90
    9/15 105.21 107.12 1.91
    8/15 104.96 106.97 2.01

    PracticalDad Price Index – December 2015

    The data for the December 2015 PracticalDad Price Index was collected and calculated in the past three days and as I worked my way through the refrigerated aisles of the stores, I could only wonder about the price of eggnog.  This is the time that the dairies start rolling out the eggnog and knowing how the price of eggs has risen because of Avian-Influenza effects upon the national supply, I wondered about the lag-effect as this works through the food-supply chain.  It certainly happened with the price of sweetened cereal (store brand frosted flakes) after the price of sugar rose because of hot money flows into physical commodities several years ago during one of the QE periods.  But it’s not something covered routinely because it’s simply not routine and frankly, it’s pricey enough that the typical family isn’t going to spend money on it.  So musings aside, what happened to the 47 item marketbasket this month?

    Frankly, there was only a minimal increase in the Total Index for the 47 item basket, rising from November’s 104.79 to December’s 104.92 (November 2010 = 100).  The 37 foodstuff item subindex likewise rose from November’s 105.97 to December’s 106.39 (again, November 2010 = 100).  Bear in mind that the Food-Only Subindex now at 106.39 peaked a year ago in December 2014 at a high of 115.13, so it’s still down 58% from it’s all-time high only a year ago.  There have been no new product substitutions made by the grocers, in which one grocer completely replaced it’s store-brand line at a markdown on products across the board.  Remember that the grocers have very thin profit margins and will be most sensitive to the spending patterns of their customers; as money flees the economy, they’ll be the first to notice the changes in spending patterns via the profit per item on the available shelf space. 

    The question now is this:  as the Federal Reserve prepares to increase the discount rate for the first time in years – via a withdrawal of money from the system by way of reverse repos – what will happen to these food prices?  Probably nothing in the immediate future, but after several months…look out below.