Practical Dad

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

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