PracticalDad Price Index – November 2015:  Deflation Reigns…

When I began the PracticalDad Price Index in November 2010, there was significant controversy over the outcome of the untried experiments of the Fed’s Quantitative Easing:  would there be a rocketing ascent into a massive hyperinflation or would the economy collapse into a deflationary black hole?  Given the speed with which opposing events occurred both in the Weimar Republic’s Hyperinflationary spiral in the early 1920s and the Great Depression in the early 1930s, it was generally supposed that whatever occurred would be quick and massive.  But we’re now more than five years from the onset of the Index and the third and last QE program has finished and it’s only now that prices are moving far more quickly in one direction than the other.  In this case, downwards.

The index began with a baseline of 100 as of November 2010.  The 47 item marketbasket, priced at three separate and unrelated grocery stores, consisted of 37 foodstuff items and 10 non-food items commonly purchased at the grocery (soap, kitchen trash bags, aluminum foil, ibuprofen and the like).  From this data each month was derived the Total Index (November 2010 = 100) and the Food-Only Subindex for the 37 foodstuff items (again, November 2010 = 100).  While the QE programs existed, both the Total Index and the Subindex rose upwards, although not at a constant or large rate.  The Food-Only Subindex actually peaked in December 2014 at a reading of 115.13; the cost of the consistently priced average basket had maxed at 15.13% higher than at the inception over four years previously.  But since then, the Subindex has dragged the Total Index downwards at a stunning rate.  As of the November 2015 data collection in the three stores, the Subindex has again dropped from October’s level of 107.07 to 104.79; this is a full 68% decline from the high reached eleven months previously.

Here’s some perspective:  it took more than four years for a consistently priced market basket to reach a high 15% above it’s starting point.  And it’s only taken less than a quarter of that time to give back more than two-thirds of that increase.

So what’s behind the collapse in the market basket’s food prices?  This is absolutely deflationary, but why?

Understand more than anything else that inflation is not a monolith.  It might be a wild beast when utterly untamed, such as in the 1920s German Weimar Republic, 1990s Zimbabwe or even today’s Venezuela…but it’s a Hydra and each head is one of the various sources of price increases.  One source of price increases comes from hot money flowing into a particular area of the economy, such as San Francisco in the years prior to 2006.  There’s only a limited supply of something – San Francisco properties – and everybody with money has to have some, so prices go up.  Until they don’t any longer.  Another source is when there are only a limited number of significant suppliers of a particular item and one or more decide to raise prices to pad the profit margin.  This was the case with Kimberly-Clark raising the price of adult diapers because they wanted to pad the profit margin.  This is also now the reason that housing rental rates are higher and growing moreso as the predominant American landlord is no longer some Mom-and-Pop but instead Blackstone Investment Group of downtown Manhattan.  Have you ever seen the neatly printed yard and corner signs offering a toll-free phone number and a standing offer to buy your house for cash?  Have you ever wondered who that is with all of the cash?  That’s Blackstone, at least in my neck of the woods.

Bastards.

But the biggest head on Hydra is the money supply, most notably measured in Economics by both velocity – the number of times that a dollar is turned over in the economy during a specified timeframe – and family income.  We all know that family incomes have declined but the monetary velocity for the supply of money (M2 as measured by the St Louis Federal Reserve Bank) has decreased to lows unseen in the lifetimes of most Americans.  When a family gets a dollar, they will now sit on it, far moreso than in the previous six decades. 

So apart from housing, what is the other principal category upon which a family spends it’s money?  Food.  And it’s here amongst the thin-profit-margin grocers that deflation truly seems to be appearing.  The grocers – corporate and independent alike – understand that their customers are stretched and are doing all manner of change to maintain sales and profits.  The Fed is terrified of a return to Great Depression-style deflation because the businesses lost all control of pricing as money disappeared from the economy and went out of business.  Today’s competition amongst the grocers is no longer based upon upscale stores and coffee kiosks but instead pricing, and bare-knuckle at that.  When a supplier is deemed to no be longer able to provide a cost-beneficial product, that supplier will be replaced by another that will; this is perhaps the key reason that the prices in the three local grocers are declining.

One of the parameters of the survey since its inception is that unless unavailable, all products within the PracticalDad market basket are store brand items.  If one of the three did not have a store brand item, then I shifted to a name brand across all three but that’s only occurred in a handful of the surveyed items.  The idea behind the parameter was that budget minded shoppers will generally forego a name brand in favor of the store brand based upon price considerations.  It is also far more sensitive and responsive to prevailing economic factors than the name brands’ manufacturers, who usually have the financial strength to absorb periodic downturns.  One of the grocers surveyed completely swapped it’s store brand supplier for another several months ago and across the line of products within that store’s basket, the prices declined.  What occurred this month was that another grocer found an even cheaper supplier and introduced some items from that supplier alongside their store brand products.  There’s been a tie-breaking rule that I adopted at the outset of the Index project in late 2010 and have used only rarely since:  in the event of any question, what would a true budget-driven consumer do?  I invoked the rule this month and used the lower priced item, even if not a store brand; the file has been amended and this grocer’s items will be used in lieu of the store brand products.  These items at one grocer were the movers behind the Index decline and should the same situation occur again, the rule will be invoked again.  So that is why we stand where we stand at the moment.  Families must stretch earned dollars and food benefit dollars further to stay afloat and it’s here at the most local level, the grocery store, that the stretch is occurring.  Because the grocers have competition to meet for the dollars and none of them will throw a family to the curb when the rent isn’t met.

PracticalDad Price Index – October 2015:  Statistical Noise on the Fifth Anniversary

The data has been collected and calculated for the PracticalDad Price Index in October 2015 and the result of this 60th monthly edition is a resounding example of minimal change and statistical noise.  The Total Index for the 47 item marketbasket is 106.17 (November 2010 = 100) while the Food-Only Subindex of 37 foodstuff items declined from September’s 107.17 to 107.07 (November 2010 = 100).  The most notable change in the monthly occurred in the lunchmeat and deli cheese items (one pound prices for cooked deli ham and store brand American cheese, respectively).  The price for each item rose by $1/pound at one of the three separate grocers to $4.99/pound apiece and was aided and abetted again by one of the other grocers not having the cheese on the shelves; this meant that the price increase for the one store had a larger impact on the average price of deli cheese due to the absence of the third.  This type of occurrence in which one or another of the stores has an intermittent hiccup in the supply of one item has been noticeable, especially within the past year.  In different months, I’ll go in to price and find that one store of another simply doesn’t have one of the sampled store-brand items on the shelf and in fact, doesn’t even have a shelf tag to indicate that it’s even in stock.  If it’s in one of the chain grocers, I’ll swing by different locations to ascertain if it’s purely a location issue and if not, I’ll simply leave that item blank for that store with the result that the average price for the item is predicated upon two grocers instead of the standard three grocers.

So this is the fifth anniversary of a kitchen table project to ascertain what’s really going on with food prices.  I began the project in the late summer of 2010 because the Federal Reserve had engaged in a series of unprecedented policy manuevers – Quantitative Easing – that had the blogosphere humming with debate of whether this would radically impact prices or whether it wouldn’t be able to offset the feared deflation arising from a near economic collapse in 2008.  Many didn’t trust the CPI issued by the government’s Bureau of Labor Statistics and I figured that I could spew essentially meaningless bytes across the screen calling bullshit or I could put previous experience to use and provide a hopefully meaningful data point.  You see, in the dark and distant past, I had an internship at the research department of a local chamber of commerce and was tasked in that summer to set up the local city for inclusion in the national chamber’s cost-of-living index, measured periodically and compiled for cities across the country.  It was grunt work contacting dozens of businesses to gain their input on an ongoing basis but it was at least educational as I also got to see how the mechanism worked.  When the chamber hired me for further economic research after college (what is the impact of an avian influenza epidemic upon the county’s poultry industry, you ask?), one of my corollary tasks was to continue with the collection of pricing and it was during this period that I was able to meet and work with the researchers who devised the survey for the national chamber.  It’s actually easy once you get it set up, provided that you go to the effort of being thoughtful in the creation of the instrument and follow up with consistency amongst the items priced and it was in the several month creation phase that various things were tried and eliminated.

So what have I learned in the past five years? 

The first thing that I’ve learned is that inflation is not an event with a single cause, but instead a process affected by a variety of often competing factors.  The bloggers and pundits in 2008 were looking at the various QE programs with the idea that the vast amounts of money about to be pumped by the Federal Reserve and other central banks into the system would have a fully systemic effect – a rising tide lifts all boats impact.  There was an opinion, which I shared, that we would go the way of the German Weimar Republic and end up with a hyperinflation that destroyed the currency.  But prices were actually affected by a wide variety of factors.  The Food-Only Subindex – consisting of 37 separate foodstuff items in bread/meat/dairy/produce/staples groups – rose from the baseline of 100 in November 2010 to a peak of 115.13 in December 2014.  While this increase was neither linear nor constant, it did rise as items were affected by different factors.

These factors included such things as simple supply and demand, as exogenous events such as drought or disease affected the price of one or more of the particular items in the basket.  One of the earliest factors captured in the index in the first year was the impact of hot money flows into commodities.  As money from the first QE program began to flow into the financial sector, the wizards of Wall Street promptly began to divert some of that into commodities with the thought that these raw materials had greater value than money itself because it was actually physical so hey, it’s gotta be good because there’s something actually there.  Among the commodities were aluminum, sugar and coffee.  The run-up in oil prices around 2012 and 2013 led to a corresponding significant rise in the grocery store as various forms of cooking oil – which had sources that also served as biofuel sources – rose significantly, albeit lagging the rise in oil prices.  The oil rise was a function of both hot money commodity flows and foreign political factors.

I’ve also learned that while prices can go down again, as it did for items such as canola oil and coffee (although not as low as it was beforehand), stealth inflation packaging is a great way for producers and grocers to gain a little bit more profit margin on their goods.  From what I’ve seen, it’s a great way to ensure a little extra profit margin as nominal prices go down on the newly repackaged item but not enough on a per ounce basis to make it truly cheaper.  It also resets the scale as it were, so that there’s a new baseline price upon which they can act in the future and over time, people will lose sight of how much the original price actually was.

But these factors are truly only temporary factors that can be remedied – and largely have been – with a change in situation.  As the QE programs ended, the hot money flows have diminished significantly and the supply issues will ameliorate over time as either supplies again increase or demand is shifted away and to other items so that there’s a new equilibrium reached.  In each of the commodities already listed – sugar, aluminum foil, coffee and cooking oil – the prices have either stabilized or again dropped, although not to the original level because prices never drop as readily as they increase (thank you, grocers and producers).

So the Food-Only Subindex rose over four years from a baseline of 100 in November 2010 to a high point of 115.13 in December, 2014 and it was this period that demonstrated the effect of the various factors as they overtook the effects of the deflation so feared by the Federal Reserve and other assorted central banks.  But it was in the ten month period from January to October 2015 that deflation took the reins from the other factors as the Food-Only Subindex literally collapsed from December’s 115.13 to this month’s level of 106.17 – a drop of 53% in a period of time only a fifth of that through which the index rose.  Despite the best efforts of the Federal Reserve to move prices upwards, it was in this ten month period that the deflation that it so feared came through as the effects of lower incomes and increased food stamp usage finally surged through the mass economy.  Grocers aren’t stupid.  They live with a thin profit margin and as a result are sensitive to their customers’ needs, wants and especially circumstances.  It’s been in these past ten months that another process, more violent, as surged through as the grocers have found new suppliers willing and able to provide lower-priced alternatives to their clientele.  The Great Depression taught that in a deflationary environment, few businesses survive and the three grocers have each gone to lengths to fight one another – and Walmart – for market share, rolling out new pricing strategies as well as simply finding new suppliers to provide the lowest cost alternatives for the customers.  Yes, other prices are increasing such as rent, health care and tuition.  But when looked at on a market basket basis, it’s the grocery where prices have crashed.

People often learn best when presented with an illustrative point or analogy and it’s here that I’ve struggled for some while to find the right one to drive the point home.  Until this past weekend when I went camping with Youngest’s scout troop and came down to the kitchen area early one morning for a coffee to kickstart the day.  As I sipped the scalding black coffee, I looked at the scoutmaster’s camp stove and noted a pot with a lid to heat up hot water.  But what was different about this pot was that there was a built-in spigot that extended from the bottom and allowed a person to dispense hot water without having to remove the lid or worry about ladles and it was this pot that struck me as the best example of the interplay amongst inflationary and deflationary factors.  Think of the economy and prices in the most general terms as a pot on a stove and prices as the level of the heated water within the pot.  Economic activity is moved by transactions much as water is heated by a source and as the economic activity increases, it heats the economy and prices will generally rise much as the water level in a heated pot will rise when the lid is on.  That’s the view that’s been taken by the economists and it’s to this end that all actions have been taken.  Prices have risen due to some of the factors that we’ve discussed before, the level bubbling due to supply shortages and hot money flows and for all of the effort, the pot really does appear to be active and hot.  But if you keep the heat on the pot yet use the spigot to remove water from the pot for a cup of instant coffee or oatmeal, the water within will continue to boil and bubble and yet the water level will drop despite the heat and this is the deflationary effect.  It doesn’t matter what occurs with the other factors.  Prices for individual items can rise like a bubble, but on a cumulative basis, the price level will drop as the incomes – the water – drain away.  Customers can and will alter their buying habits, replacing steak with inferior goods or simply doing without and the grocers and producers will have to do whatever they can in order to continue to make sales.  And when they can do no more, they’ll simply go out of business like their predecessors in the Great Depression.

So what will be the outcome of this thus-far eight year trip down the monetary rabbit hole?  Will there be hyperinflation that destroys the currency or will deflation win out?  The sad reality is that nobody really knows now since the central banks took actions that literally destroyed the metrics that were used to understand what was happening around us.  This isn’t a national pricing project as several respected financial/economics bloggers have correctly pointed out and I’m not about to pretend that it is; but I do believe that it can and does serve as a reliable datapoint for those who are interested.  And if you’re interested in doing this to satisfy your own curiosity, just be sure to be consistent in the marketbasket over time.  But even if you don’t go this far, make it a point to pay greater attention to what you’re seeing in the stores and on the streets, because it’s our own inattention that has helped this monetary nonsense flourish.

PracticalDad Price Index – September 2015:  Stabilizing, but…

The data from the September 2015 PracticalDad Price Index is in and the price declines of the past nine months have ceased and stabilized, for now at least.  But I’ve been noticing something and it’s gotten me to thinking about the earliest stages of what’s happening with wealth inequality and how it might be starting to affect the grocery store.

In terms of the actual Index results, both the Total Index (47 total market basket items) and the Food-Only Sub-Index (the 37 foodstuff items in that basket) stabilized with the Total Index rising incrementally to 105.21 (November 2010 = 100) from August’s Total Index reading of 104.96.  The Food-Only Sub-Index likewise rose slightly to 107.12 in September (November 2010 = 100) from August’s result of 106.97. 

But what have I been noticing in the past number of months and what has this to do with income inequality?  Let’s take a quick look at income and wealth inequality first.  The disparity between the highest levels and the remainder of American society have been noted in several ways.  Obviously, the percentage of assets held by the top 3% of families has reached large proportions as the remaining 97% of American families have fewer and fewer assets available to them.  The lack of retirement savings has led to a situation in which middle-aged and older Americans have a lower unemployment rate than other age groups.  As income and wealth have bifurcated – split – this has likewise been noted in the prices of different markets of items.  While the BLS reports that CPI and wholesale prices are largely static, there’s been greater price inflation in products oriented towards wealthy buyers.  The price of truly high-end luxury automobiles has risen as has the price of collectible artwork as the ultra-wealthy look for new assets in which to place their money.  The point to take away from this is that there’s a notable split between the economics for the average American versus the wealthier American.

So how does that impact the daily shopping in the grocery store?  What I’m noticing over the months leads to this question:  is the product mix on the store shelves beginning to disproportionately affect the lower-income level consumers as their best alternatives for products are either removed completely or replaced with lower-quality products as grocers rework their product mix in order to survive?

The key point to remember about grocery retail is that it’s a business with extremely low profit margins and that with a limited amount of shelf and freezer space, products have to have a sufficient amount of profit or they’ll be removed and replaced with an item that’s more profitable.  Grocers do pay attention to this metric and are constantly re-evaluating their product mix in order to maximize their own bottom-line.  What I’ve noticed is that the grocers are slowly – and thus far on a small scale – removing items from the shelves that are better for customers but worse for their bottom line.  It began over a year ago when one of the grocers – an independent – simply removed the two baby-related items (23.4 ounce Enfamil formula and a store-brand case of size 3 diapers) from their shelves entirely.  That formula is no longer sold as the selection was thinned out and the store brand cases of diapers were eliminated.  Parents with children could still purchase the size 3 store brand diapers, but in the smaller packaging with a higher per-diaper cost.  About three months ago, the second of the three retailers likewise removed their case of size 3 store brand diapers from all of their stores – I checked multiple locations in that chain each month – so that that option was no longer available for the family with small children.  Again, the smaller packaging was available, but it’s more expensive on a per-diaper basis.

Another instance pertains to the sale of 80% lean ground beef.  Over the past several months, one of the grocers – which has also removed the case of store-brand diapers from the shelves – has eliminated 80% lean ground beef from its meat case; it still sells the leaner ground beef at various percentages (85 and 93) as well as the less expensive 73% that is sold in a tube.  Please note that this same 73% ground beef tube is sold in all of the stores.  Given that the markup is progressively higher for each lean/fat category as it increases, the grocer is implicitly stating that the low cost mass produced 73% lean container will be available for the low-end market but that the profit mix is best served by eliminating the 80% and pushing the higher end, more profitable ground meats.  We’ve become used to the sales pitch that leaner meat is better and more will hopefully – for the grocer – purchase the less-fat ground beefs; what’s interesting was that in researching this article, I found that the yield of actual cooked meat was most cost-effective for the 73% lean than the higher leans since a pound of 73% lean after cooking left 11 ounces of meat while the far more expensive 93% lean left only 12.75 ounces of meat after cooking.  The lost weight was due to fat that was able to be drained away.  In this particular instance, it might be a mixed blessing for the lower-echelon consumer if he is willing to be serious about draining the fat from the cooking.

There’s early initial evidence that the same issue is occurring with both hot dogs and tuna as well.  One grocer has eliminated the store-brand hot dog in entirety while I’m noticing that another grocer is starting to not carry store-brand tuna; I’ll be checking the various locations for that grocer in the next several months to verify whether that is or isn’t the situation.

This is assuredly a small sample on a local level and I’m not going to fight to show that it may or may not be occurring nationally.  But it is indeed occurring here and my concern is that if it continues, what is starting on a very small scale will accumulate to more and more products that are, on the whole, detrimental to the family trying to make the monthly budget work.

And because a full update hasn’t been shown in several months, here is the listing of Total and Food-Only Index results going back to December 2014.

 

PracticalDad Price Index – September 2015
Month Total Index Food-Only Index Spread
9/15 105.21 107.12 1.91
8/15 104.96 106.97 2.01
7/15 106.30 107.35 1.05
6/15 107.11 106.46 (.65)
5/15 107.56 107.74 .18
4/15 108.21 110.20 1.99
3/15 107.89 109.50 1.61
2/15 109.42 112.08 2.66
1/15 111.32 114.00 2.68
12/14 111.18 115.13 3.95

PracticalDad Price Index – August 2015 / Total Index Collapse

PracticalDad note:  This is an abbreviated update for the August 2015 Price Index.  The summer has been busy and full and writing has been curtailed because of, well…life.  That said, the pricing for the August edition of the PracticalDad Price Index did occur at the first of the month and this is the abbreviated version; more will be coming on this when things gear up again in another week.

The PracticalDad Price Index resumed it’s decline, which has occurred almost uninterrupted since reaching the peak in late 2014 and early 2015.  What is most notable is that the Total Index (covering the cost of 47 grocery store items priced in three unrelated grocery stores with November 2010 = 100) dropped significantly by 1.34 basis points from July’s reading of 106.30 to August’s level of 104.96.  The Food-Only Index of the 37 Foodstuff items from the basket also declined in the month, although not as precipitously; July’s Food-Only Index was 107.35 but declined to 106.97 in August.  Please note that the peak index reading for each category was 111.32 in January 2015 for the Total Index and 115.13 in December 2014 for the Food-Only Index.  Since those peaks, the Total Index has given up 56% of the price increases that had occurred since the Index’s inception in November 2010; the Food-Only Index component has given up 54% of the price increases that occurred since November 2010.

PracticalDad Price Index – July 2015

The pricing for the July 2015 edition of the PracticalDad Price Index was completed last week and this is one of those months where honestly, not much happens.  The Total Index (comprising the full marketbasket of 47 grocery store items priced at three separate and unrelated grocery stores) did drop from June’s 107.11 to a new level of 106.30 while the Food-only Index (comprising the basket’s 37 foodstuff items) rose however from June’s 106.46 to July’s 107.35.  So the question is, how can foodstuffs rise while the total index declines? 

In the past seven months, the grocers have taken multiple steps to lower their regular prices.  One chain implemented new regular store-brand pricing under a Low Everyday Prices banner while another took similar steps under an Everyday Low Prices banner; yep, you can’t make this up.  Those two had decreased the regular, non-sale prices of a multitude of store-brand items and as the effects of these flowed through the Price Index, the independent grocer switched the supplier of its store brand items so that the lower prices on items were noted by the Index as well.  The result was notable as an almost ripple effect on the results as one change after another in the span of December 2015 through July 2015 affected the Index downwards in a deflationary manner.  The most recent effects are from the independent grocer as it continues to roll out new store-brand items; this occurs both as they become available and as the old inventory items from the previous supplier are exhausted and subsequently replaced by the new items so that any rollout can take months before it’s completed.  In July’s edition of the Index, the independent introduced the new supplier’s version of plastic kitchen trash bags (13 gallon) at a price that was 29% lower than the old supplier’s offering.  Couple this with some much smaller changes on non-foodstuff items and the effect is significant. 

Amongst the 37 item foodstuff components, what was notable was the effect of hot dogs.  In this case, one of the chain’s store-brand hot dogs joined the other in a stealth-inflation increase as the packaging decreased from a full pound per eight hot dogs to 15 ounces and since I monitor that item by weight – one pound being the original standard – I adjusted the price upwards to reflect what it would be had it continued with the conventional 16 ounce packaging.  But unlike all of the other months however, the independent grocer’s store-brand hot dogs simply disappeared from the case and it continued to be gone over the multiple visits that I made to that store to check on the hot dogs (and yes, it seems odd to walk into a grocery store, look in a case and just walk out again).  The independent’s brand has been consistently less than the chain brand hot dogs and this absence meant that the average for the hot dogs is now significantly higher than before – hence the higher index level, all other things being equal.  My suspicion is that they’re in the process of shifting that product – hot dogs – to the new supplier but that it simply wasn’t available yet and I’ll see that in the next month’s edition.  To be honest, there has been a hot dog brand that cost less than even the independent’s store-brand but I’ve not monitored that since the supposition from the outset of the Index was that I’d be following store-brands whenever they were available and before I deviate, I want to assure that this isn’t a case of just awaiting a new supplier’s product.  If that doesn’t happen, then I will move to that lower-priced brand in lieu of the store-brand product.  What was fascinating in a massively geeky way was that the independent’s case for hot dogs was missing multiple brands and much of the space had been given to larger packages of sausages in what appeared to be an attempt to keep it from looking completely barren.  We’ll have to see how it appears next month.  And yes, the price of eggs increased due to diminished supply because of the Avian Influenza that’s wiped out about a tenth of the nation’s flock, also contributing to the higher level, but it was frankly less of an increase than I expected.

PracticalDad Price Index – June 2015:  Crashing

Let’s divorce ourselves from the notion that the PracticalDad Price Index monitors the pricing activity of a fairly typical family marketbasket from a grocery store – or three separate and unrelated stores as in the case of the Index.  Let’s say that the figures represent an unknown something that could just as easily be good as bad.  Now assume that the figures have risen from a baseline of 100 to a high of 115.33 over a period of 49 months, a rise carved with ups and downs but generally following an upwards trend.  If you were to find that this increase over a 49 month period was eliminated by more than one half – 57% to be exact – in just six months, how would you describe it?  A drop?  A decline?  A fall?  A collapse?  A crash?  The wording can be argued but my gut response is that it would be akin to a crash, a sudden crunching of the upwards slope in such a way as to suggest that said curve ran headlong into a concrete abutment and folded in upon itself.

Such is the case with the June 2015 edition of the PracticalDad Price Index as the Total Index fell yet again to 107.11 in June from May’s previous reading of 107.56 (November 2010 = 100).  This is the fourth decline in six months from the December 2014 level of 111.18.  But whereas the Total Index covers all 47 items in the marketbasket, what has grabbed my attention is the simple collapse of the Food-Only Sub-index, which consists of the 37 foodstuff items within the larger 47 item marketbasket.  It’s this sub-index (again, November 2010 = 100) which has historically shown the effects of price increases and decreases, while the non-food items have, for the most part, been generally controlled.  The Food-Only Sub-index reached it’s zenith in December 2014 at 115.33; yet it subsequently began a steepening slide that led to June’s Sub-Index reading of 106.46.  This is the crash to which I’m referring in the title – that fully 57% of prices increasing over four and a half years has been wiped away in six months.  Yes, a pound of 80% ground beef is still high and the rising price of a dozen large eggs is starting to show the effect of the spreading Avian influenza through the national poultry flocks but these supply and demand issues are being played out against price declines in other foodstuffs as deflationary pressures come into play in a complex and dynamic process.

So what is this deflationary pressure and how is it playing out in the stores?

Understand that the price changes in inflation (upward) and deflation (downward) are symptomatic of other underlying issues and in the case of deflation, the biggest underlying issue is the amount of money flowing through the economy; in the case of most, that flow would come from the family income.  The Fed, and other central banks, are terrified of deflation and want inflation.  Their premise is that rising prices mean that producers and manufacturers can charge more for their products and then in turn pass that along to their employees via higher wages or hiring of more people – in the ideal world, both would happen – and these happy employees would feel wealthier and more comfortable.  That would then lead to greater spending by the employees and their families, meaning that more would then flow back to the producers and manufacturers and the cycle would continue.  The policy response of the central banks is framed by their predecessors’ experience during the Great Depression of 1929 in which deflation ruled the day.  Businesses lost complete control of their capacity to maintain pricing as consumers lost their money and cut back on spending; as spending was curbed, less was bought and businesses were forced to lower their prices to compete with the result that the employees weren’t receiving higher pay.  As they didn’t see wage increases and saw other businesses slowly shutter, they in turn cut back on spending further to protect themselves and businesses saw even fewer sales, meaning even more downward pressures.  The result was a highly negative reinforcing cycle that culminated in a quarter of the American workforce unemployed and thousands of businesses and banks shuttered forever.  So the ability to control pricing is key and that in turn depends upon the ability of people to spend and that ultimately depends upon people having something to spend in the first place.

That’s lovely…but how does that theory seem to be playing out in the grocery stores?  What I’ve seen over the past several months appears to be significant changes in pricing strategy.  The backdrop to all of this is that the median family income is dropping across the country and that’s compounded by the burgeoning number of Americans now receiving food assistance, so the money flow simply isn’t there as it was several years ago.  There was a period within the past decade in which grocery stores upgraded themselves with coffee kiosks and delis, enlarging and appealing to a more upscale clientele.  As the money flows out of the general economy however, people feel less inclined to spend and the cosmetic changes matter less and the stores’ ability to compete is increasingly reduced to bareknuckle price competition.  During the first quarter, one grocery store in the survey, owned by an international chain, instituted an “Everyday Low Pricing” policy with a lower price on multiple common foodstuff items.  Meat, a supply-and-demand affected item, was still expensive but from one month to the next, items such as bananas and potatos, canned vegetables, and other foodstuffs underwent significant price decreases.  Approximately two months later, another grocer – an independent but one which whose generic brand is produced by a national chain on behalf of independents – began a wholesale switch to another generic brand producer and the prices on multiple foodstuff items underwent a corresponding decline.  This particular change is still playing out in the store as they still sell the discontinued generic brand and will do so until their inventory is exhausted, at which point I anticipate that they’ll offer only the new generic label; it’s happened before and I expect it to happen again.  The remaining grocer is a regional grocery chain and has had difficulty maintaining prices relative to the two competitors and until this month, I hadn’t seen much different in terms of their pricing.  What I observed the other day during the pricing however, was a number of lower priced items in the marketbasket and in those cases, there was also signage indicating a new “everyday low pricing” policy.  This was particularly the case with lunchmeat, deli cheese and bananas as the minimum drop amongst the three items was 20%.  In the case of this third grocery chain, I know from first hand experience that they’ve had profitability issues and have dealt with it by closing stores and reducing hours at other locations.  The evidence suggests to me that despite these issues, they’re having to compete with the others now on the price front.

So the evidence suggests that amongst the falling income/money flow through the general economy, the three grocers are now competing on a price front – much as their Depressionary forebears did 75 years ago.  If this income situation isn’t somehow rectified in the relatively near future, the prospect is that the grocers will lose control of their pricing in a deflationary spiral and one or more will fail and the first will be that one which doesn’t have the sufficient buying power that comes from larger entities.  For example, which would you consider to fail first – Walmart or Joe’s corner grocery?  Because people aren’t spending and making money course through the economy, the prospect exists that one or more of these grocers will fail – and this fear of more failing businesses is the rationale behind the policies of the central banks.  It is also the fear behind Wall Street Journal reporter Jon Hilsenrath’s likely to be infamous letter to American consumers.

One final note when you look at the Indices results from December 2014 through June 2015.  The column entitled “Spread” pertains to the differential between the Total Index reading and the reading for the Food-Only Sub-Index.  I began to use it some time ago since I found it helpful to indicate the level of activity on the part of the Sub-Index versus the entire Index.  You’ll note that as of December 2014, the spread between the two readings was 3.95 basis points and was positive because the Food-Only Sub-Index had risen that much higher in comparison to it’s Total Index companion.  But over the past six months, this spread has declined significantly and consistently until June 2015 when the spread was actually (.65), meaning that the Total Index was now actually higher than the Sub-Index…something that hasn’t happened before in the four and a half year history of the PracticalDad Price Index.  Yes folks, food prices – as measured on a marketbasket basis – are now dropping.

 

PracticalDad Price Index – June 2015
Month Total Index Food-Only Index Spread
12/14 111.18 115.13 3.95
1/15 111.32 114.00 2.68
2/15 109.42 112.08 2.66
3/15 107.89 109.50 1.61
4/15 108.21 110.20 1.99
5/15 107.56 107.74 .18
6/15 107.11 106.46 (.65)

Cashless America:  The Kids’ Perspective (Part 2)

Note: This is a follow-up to a previous article – Cashless America: The Set-Up – which recently ran on the site.  The two were originally meant to be one article focusing on the response of my two older kids, Eldest and Middle, but it made more sense to split it into two pieces, the first of which briefly laid out the gist of the arguments from proponents of moving to a digital, cashless currency.  Now I’ll get on to the kids’ perspectives.

After reading a spate of articles about the notion of abolishing physical currency, I thought that it would be interesting to see what Eldest and Middle thought of the concept.  Eldest is a rising college senior home from a semester abroad, intent on making bank for the coming year.  Middle is a high school senior who will leave for college in the Fall and is now finishing AP Economics (which, if you’ve ever read the supporting textbook, is a certifiable cure for insomnia and has absolutely no bearing on anything approaching reality for nascent adults).

Middle was first up as he was first down for breakfast and I prefaced my question with the caveat that I’d simply like a cogent response by the evening…just take a little time through the day to think about this and if I could have a response by evening, that would be great…  The question was this: what would you think if our nation moved to a simple digital currency with all transactions and accounts managed digitally?  There would no longer be any physical currency, bill or coin, for use.   To be fair, as much as it pains me, some of the proponents only want to do with large denominations above $50 or $100 bills…others however, want all currency removed.  His response was truly surprising in its immediacy: That would be terrible.  TERRIBLE if that happened.  His first reason was about safety.  Events have shown that anything – Dad, ANYTHING can be hacked – could be hacked with sufficient ingenuity and resources and it would be conceivable that everything could be simply gone in a nanosecond.  After that comment, he then covered his right eye with his right hand and making an ‘O’ with his left thumb and index finger, placed them over the left eye.  I looked at him blankly and he simply said Big Brother.  He didn’t want everything to be available for viewing, nor did he want any and all of his transactions to be traceable. That kind of power shouldn’t be available to the government nor to the corporations.

Eldest came down later before heading off to work and received the same preface about taking time and then the question, and her response was surprisingly immediate as well.  She likewise disliked the notion for the same reason about safety, noting again that anything digital can be hacked.  The kids are the products of the online digital age, with a far greater grasp of its benefits and faults that those of us who came of age in the analog era and her first thought went to how all a person’s financial eggs shouldn’t be kept in one digital basket.  As she stood there, her next response was something that I had simply never considered.  It would really make it hard for illegal immigrants here, though.  When I asked why, she responded None of them have bank accounts and their transactions are usually done in cash because they don’t want to bring attention to themselves; then they send the money home via money orders…so it would have a massive impact on immigration.  It was then that I recalled that part of her classwork during the semester abroad pertained to studies of immigration, illegal and legal, and that she’d actually had conversations with both immigrants as well as members of the US Border Patrol.  The comment about the impact upon illegal immigration was something that I’d never even considered although I expect that the ability to more effectively control illegal immigration would certainly be an argument on behalf of a fully digital currency.

I did have a short conversation about Cyprus and the use of the “bail-in” to manage the bank recapitalization, explaining it briefly to Middle; he confirmed that he understood since he already understood the concept of the bail-out as practiced here in 2008.  He commented that it sounded like a socialist thing to do whereupon I asked where the original concept originated; when I told him that it first came about from a combined effort of the FDIC and the Bank of England, his response was concise and rude.  Please understand one key point about your status as a retail depositor in a bank:  after the financial crisis of 2008, legislation was passed that effectively shifted the status of the retail depositor – you and your kids’ bank accounts – from that of a protected entity in the event of the institution’s difficulties to that of an unsecured creditor.  There is a legal hierarchy in the business world of who has greater risk in the event of bankruptcy and thus stands first in line to lose their money should liquidation be required.  In the pre-2008 world, the retail depositor was protected at the rear of the line but the passed legislation now equated the retail depositor to that of an unsecured creditor – someone who simply loaned money to the bank without asking for collateral – and moved you to the head of the line.  So even if your bank is small and well-managed, another financial firestorm will put your deposits in the crosshairs should the government move to a bail-in approach.

Oh, and by the way…when the Dodd-Frank Bill was passed in 2010 as a response to financial crisis, it made another reclassification.  The banking system – predominantly the Too Big To Fail banks– have been heavily involved in highly profitable derivatives trading; that bill shifted the status of derivative counter-parties to that of supercreditor so that they are first in line to receive monies that are redistributed in the event of a bail-in.  In other words, we are at the head of the line for liquidation and they are at the head of the other line for reimbursement.  Lovely, isn’t is?

And that is at the heart of the cashless proposal.  The thrust is to move as much money as possible back into the banking system so that in the event of another Lehman style event, there is sufficient capital available to reconstitute the financial system and make good the losses via bail-in before having to go to the government via the bail-out.  It is about expanding the number of unsecured creditors and controlling their funds by eliminating their ability to move their money out of the system to protect themselves.  The fact that the institutions are never fully protected from digital intrusion and theft is serious; both of the kids are right in that there’s always a way to hack the system.  But the issue here is purely and simply control, control of assets and control of the redistribution of those assets should worse come to worse.  And as to the immigration aspect that Eldest raised:  it isn’t a key aspect to the proposal but I expect that if this cashless currency proposal gains legs, it will certainly be trotted out as a beneficial side-effect to help control the illegal immigration problem.

The kids aren’t stupid, they can see what could happen.  But it requires a conscious effort on your part as a parent to periodically pull them out of the Matrix and explain things to them.  Do it on car rides, do it at the dinner table, do it in the moments when you might be just sitting together.  Create small bits of knowledge as informational pebbles to add to their pile and do so purposefully through the years.  There will come a time when they’re older that they can begin to take the pile and build structures of their own that might surprise you.  That also means that you have to pay attention as well. 

Cashless America:  The Set-Up (Part 1)

PracticalDad Note: There’s been considerable and increasing talk within the past month about the notion of banning all physical currency.  There are plenty of more-experienced than mine with information out there, but this article started as commentary from my two older kids when I explained the digital currency notion to them.  The article ultimately became too lengthy and I decided to split it into two parts, the first – this part – being the set-up on the cashless America concept.  I’ll follow shortly with the take-away from Eldest and Middle in another article with some responses that surprised me.

There have been a spate of articles and interviews within the past several months about the concept of doing away completely with physical currency in the American economy and moving to a purely digital currency.  Articles and papers have come forward from several influential sources and in late March, Janet Yellen – the chair of the Federal Reserve – made a comment that questioned whether physical currency such as coins and bills was actually a worthwhile store of value.  It’s obviously an idea that’s being passed around the Ivory Towers and Hallowed Halls of Power, so certain folks are going to take a run at making this the wave of the future.  But radical ideas such as these take time and so I thought that I’d get the input of Eldest and Middle since it’s their rising generation that will be affected the most. 

For the record, Eldest is a rising college senior who has by now not only traveled abroad, but studied abroad as well and is now home to replenish the bank accounts before returning for the final year of college.  Middle is her younger sibling, a high school senior who has likewise traveled abroad and is in the midst of AP Economics, much to his chagrin.  He initially thought that it would be fun given some of the conversations about money and real world that we’ve had over the years but now believes – as I do after perusing his text and notes – that it really is not much more than mental masturbation.  So the other morning, I asked them to take some time through the course of their day to consider the following question:  what would be your thoughts on eliminating all physical currency and moving to a purely digital currency, with transactions managed solely by the use of debit cards? 

Let’s take a moment first to look at what’s being proposed.  The initial concept was posited by Harvard economist Kenneth Rogoff in a 2014 paper, Costs and benefits to phasing out currency.  According to Rogoff, there are two principal reasons for the gradual and final abolition of physical currency. 

The first goes to providing additional firepower to central banks in their effort to spur inflation to rates of about 2%.  A core tenet of present monetary theory is that a moderated inflation – no more than about 2% – is a good thing as gradually rising prices enable producers to continue to hire and pass along rising wages to workers, who then spend that money and help perpetuate what is, in theory, a virtuous cycle.  Note: This is the theory and ignores such real world effects as free-trade globalization, currency pegs/manipulation, and all of the things that actually occur in the real world.  As the global economy has tried to recover in the years since the Financial Crisis and the collapse of Lehman – when a monstrous amount of capital was utterly destroyed – the numerous central banks have created a tsunami of liquidity in order to offset deflationary pressures and hopefully create a moderated inflation that meets the core tenet.  Deflation is feared because in the experience of the Great Depression, producers lost control of all pricing power and were largely driven out of business, feeding the unemployment as more and more jobs were eliminated.  But we’ve since gone through an extended number of years of Zero Interest Rate Policy, aka ZIRP and the ability of the central banks to use interest rates as an effective tool against this deflationary environment is reaching what is referred to the effective lower bound.  In terms that any kid taking AP Economics would learn is that there is no longer any marginal value to changes in rates, although certain European nations and the EU are pursuing Negative Interest Rate Policy as the banks are now charged by the central banks for keeping deposits.  The concept behind this stunning bizarro policy – which thoroughly upends literally millenia of conventional wisdom touting the value of saving – is that spending must be spurred and money must not be kept as savings, but instead forced out into the economy in order to be spent and spur economic activity. 

Understand a central concept here:  a dollar bill is not just called currency, but also referred to in econo-speak as a “Zero-Interest Negotiable Bond”.  It is a piece of paper that pays the bearer absolutely no interest whatsoever but can be easily traded from one user to another in the course of daily economic life.  The upshot is that as interest rates approach zero, there is no longer any real impetus to keep money in the bank but instead, to just go ahead and keep it under the mattress or even use it in lieu of credit cards which actually have high rates when contrasted with the rates available for various savings products.  But as rates not only approach zero but actually go below zero into negative interest territory – in reality, where the banks are presently charged for keeping money on deposit and have simply not yet passed that cost onto the retail depositor – then the average person will conceivably ignore the banking system and save money by simply removing their money from the banks completely.  The upshot is that a larger percentage of total money is then outside of the banking system and beyond control of the central banks, even further lessening the tools that they have to affect the economy.

The second aspect of the Rogoff proposal is that an outsize proportion of illegal and/or unreportable-tax transactions are handled via physical currency.  Pay cash for a used vehicle for instance, but report a smaller amount than actually paid via cash in order to mitigate state sales tax when title is transferred; because there’s no actual check to serve as documentation, cash can conceivably hide money from the tax coffers.  So eliminating all physical currency transactions means that all transactions thus occur within a monitorable system, eliminating the prospect of illegality and tax fraud.  The sop to this aspect is the same sop to critics of electronic domestic surveillance – this would only affect criminals and cheats and honest, law-abiding citizens would have no worry since they’re doing nothing wrong.&nbsp: Given the weaponization of such agencies as the IRS, I’m not certain that I’m the least bit comfortable with that surmise.

There’s another aspect of this that bothers me, and that pertains to the financial solution to the Cyprus banking crisis of several years ago.  As a recap, the Cypriot banking system – a favorite offshore banking location for wealthy Russian oligarchs – ran into problems and was on the verge of collapse.  But instead of a government sponsored bailout as in the US, circa 2008, the Cypriot government pushed through a “bail-in” in which bank depositors were forced to give up a portion of their deposits to help keep the banks afloat.  In their ideal world, the hit would’ve been on the large Russian depositors with smaller depositors saved but in our present system, in which the uber-wealthy have access to cash and information, the Russians had largely removed their funds by the time that knife fell and while the smallest depositors were exempted, the original targets had all moved onwards to safer grazing territory.  This might sound faintly interesting but for the realization that the “bail-in” concept was originally floated by the FDIC, the US governmental agency tasked with insuring bank deposits.  The notion was that there had to be a better way than just spending more government money and that better way was found with the depositors.  So bear with me here: if you’re worried about the bank on a very short term basis, as happens during a good, old-fashioned bank run, your option is to pull out the money as cash and keep it safe under the mattress.  But if there’s a cashless society, then the only place to move your money is to another institution since there would be currency.  You are, in effect, effectively trapped within a system that could decide it was better off to use the depositors money in the form of a “bail-in” of teetering banks.  And if you think that the pain would be spread amongst everyone, remember that the uber-wealthy depositors in Cyprus had most of their money removed by the time that the ball dropped on the bail-in. 

PracticalDad Price Index – May 2015:  Food Price Declines Resume

The May 2015 pricing for the PracticalDad Price Index was finished the other day and after a month in which the decline ceased, May showed a major resumption of the Index’s drop.  The basket’s Total Index for May 2015 stood at 107.56, a decrease from April’s Total Index of 108.21 (November 2010 = 100).  But the 37 foodstuff item Food-Only Sub-Index dropped precipitously from April’s 110.20 to May’s 107.74 (November 2010 = 100); were it not for an outlying 43% increase in the average price of a box of non-food kitchen trash bags, the Total Index would also have dropped more precipitously from April’s level.

For a better perspective on what’s happening with the marketbasket – particularly the foodstuffs such as meat, dairy and produce – consider this about the Food-Only Sub-Index.  It took four years and a month for the Food-Only Sub-Index of 37 items to rise to it’s highest point in December, 2014.  At that time, it stood at it’s apex level of 115.13 (November 2010 = 100), so that the same basket of 37 separate food items had risen by 15.13% from the baseline in November 2010.  Within a period of five consecutive months, that sub-index’s rise has fully collapsed by almost one half – 48.9% to be precise – to point at which the most recent sub-index reading in May, 2015 stood at only 7.74% higher than the baseline composite level in November 2010.  So five months of declines in the sub-index have positively wiped away about three years of price increases in both the Total Index and the Food-Only Sub-Index.

What’s happening?  There are 47 commonly used grocery store items within the overall marketbasket, of which 37 items are actually foodstuffs – meat, breads, dairy, produce, staples, etc – and it’s among the foodstuffs that the prices are declining.  From April to May of 2015, 14 of the 37 foodstuff items – more than one-third – had declines in prices with the average price decline being 4.97% and the median price decline at 2.55%.  There were only five items in the entire basket with price increases; the average price rise of the five items was 10.24% but the median price rise was only 2.6% due to an outlying price increase of 43% for one particular item at one of the three surveyed stores.  If this outlier was removed, the average price increase would have been only 2.05%. 

What has been notable is the activity within two of the three surveyed – and completely unrelated – grocery stores.  One is an independent single supermarket but affiliated with a national supplier that provides the store-brand items for independent supermarkets.  That market has, within the past three months, shifted to a new supplier that provides the store-brand items under a different label than before and there have been price drops in multiple surveyed foodstuff items with this supplier’s introduction.  The other supermarket is owned by an international chain with stores throughout the Northeastern and Mid-Atlantic regions of the United States and this whole store is now in the process of introducing a more aggressive “Every Day Low Prices” policy with price declines in multiple foodstuff items. 

    The long and short of this is that as incomes continue to erode and increasing numbers of Americans receive governmental food assistance, the grocers are engaging in much more aggressive price competition to survive in a business with very thin profit margins.  Each of these two has access to considerable negotiating leverage with wholesale producers and are using it in order to keep sales moving.  They’ve tried to differentiate between themselves with coffee kiosks and upgraded facilities, but the ongoing economic decline is rendering these moot and it’s now coming down to bare-knuckle pricing to survive.  The third store is a regional chain with less negotiating power since it simply doesn’t have the cumulative customer base and it’s this store that first went to price competition over a year ago; it’s this store that’s now unable to keep pace with its two competitors in the survey pricing.

Prices of individual items will rise and fall for a multitude of reasons.  Supply and demand, as with meat and dairy.  Commodity increases and decreases due to hot money flows, such as with sugar and coffee.  Seasonality, such as with eggs.  This was why I began to monitor food prices as part of a comprehensive marketbasket in November of 2010; it was to try to look at the notion of inflation/deflation as a whole and in this whole, the recent actions of the grocers are strongly indicative of a broadly deflationary move.  The principal reason that the Federal Reserve and government are terrified of deflation, as last experienced in the Great Depression, was that companies were ultimately unable to control their pricing with the collapse in spending.  They consequently went bankrupt as their sales disappeared and what we’re now seeing in a localized section of the country is a replay of that scenario as grocers descend to bare-knuckles pricing tactics to maintain sales in an increasingly harsh business environment. 

So here are the monthly results for the PracticalDad Price Index.

 

PracticalDad Price Index – May 2015
Month Total Index Food-Only Index Spread
12/14 111.18 115.13 3.95
1/15 111.32 114.00 2.68
2/15 109.42 112.08 2.66
3/15 107.89 109.50 1.61
4/15 108.21 110.20 1.99
5/15 107.56 107.74 .18

PracticalDad Price Index – April 2015

The April 2015 PracticalDad Price Index was completed and compiled in the first days of April and the results show that – for now, at least – the collapse in the marketbasket prices from December 2014 through March 2015 have stabilized, increasing slightly from March.  April’s Total Index for the 47 item PracticalDad Marketbasket stabilized at 108.21 (November 2010 = 100), up from March 2015’s Total Index reading of 107.89.  The 37 foodstuff items that comprise the Food-Only Index in April stood at 110.20 (November 2010 = 100), up slightly from March’s reading of 109.50.  Note that especially regarding the 37 foodstuff items (for a complete list, see here), the drop over the four months from December 2014 through March 2015 accounted for fully 37% of the index rise over the previous four year period since the Index’s inception in November 2010.

What arrested the decline was the increase in the seven item Meats category, as four of the items rose at an average clip of 9.5% from the previous month.  Surprisingly, a pound of 80% ground beef remained stable at $4.32 while chicken, deli ham and hot dogs rose significantly.  When you remove these four increases, there was an equal number of price increases and decreases (6 each) amongst the remainder of the marketbasket items.  Given that the meat category is highly affected by the effects of supply issues, especially PED and the drought, a cursory removal of those supply issues would indicate that the remainder of the 47 item basket indicates that deflation continues to prevail in the economy.

Since deflation is precisely what the Federal Reserve is working to stop, it’s helpful to look at what the monthly pricing excursions and results are showing.  Understand that what scares businesses and the Federal Reserve so much about deflation is that it erodes and destroys a business’ ability to maintain and control its own pricing structure; money flows from the economy, leaving people with less and the consequent result is that businesses must continually cut their own prices to maintain sales.  Let’s take a look at the workings of the monthly pricing to gauge this.  I price at three separate and unrelated grocery stores: one owned by an international grocery corporation, another owned by a regional American chain and finally, a fully independent grocer.  Because one of the original tenets of the index is that the cost-conscious buyer will purchase store-brands whenever possible, a significant portion of the marketbasket is composed of store-brand items.  As money continues to flow out of the Main Street economy and the middle class is winnowed away, sales volume declines and prices decrease in order to maintain sales.  The news that for the first time, restaurant sales were larger than grocery sales nationally means that there is now additional pressure on grocers; forty years ago, they competed with one another and starting maybe a decade ago, they had to begin competing with Walmart as well.  Now they have to compete with restaurants as the younger generation shifts its spending back to inexpensive dining out instead of cooking.  Given that more and more of the Millenials are now having to live at home with the parents – a largely unwelcome event – they are gathering together to eat out instead of sitting in the old family kitchen spending even more time with the ‘rents.  The upshot is that while there are certainly situations which lead to price increases, such as the diminished supply of the national cattle herds, the composite activity indicates that overall, deflation is occurring.  Amongst the three sampled stores, the most substantial price decreases occur in the internationally owned store, followed by the independent grocer and then the regional chain bringing up the rear.  What does this suggest?  As with Walmart, the international chain is able to order and purchase in significant enough quantities that it can force producers to accept lower revenues.  Although the independent grocer is a small one-store operation, it is also affiliated with a national generic brand that supplies an untold number of independent stores across the country with a substantial purchasing power.  Because the regional chain simply doesn’t have enough stores, it is unable to command such and the result is that the store’s marketbasket prices are generally higher each month.  I can also attest from anecdotal evidence and observation – buttressed by a periodic review of the financial media, that this regional firm is suffering from greater financial difficulties than its two competitors. 

As a commenter from Calculated Risk once noted about deflation several years ago: In the early days of the Depression, a candy bar cost a nickel. By 1931, you could get three candy bars for a dime and by 1933, nobody had a dime.  So money is flowing away from the real economy as we speak and while some prices increase due to true demand and supply, prices are dropping on a composite basis.  We’ll have to see how long this can continue.

 

PracticalDad Price Index – April 2015
Month Total Index Food-Only Index Spread
11/14 111.15 113.87 2.72
12/14 111.18 115.13 3.95
1/15 111.32 114.00 2.68
2/15 109.42 112.08 2.66
3/15 107.89 109.50 1.61
4/15 108.21 110.20 1.99