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.
|Month||Total Index||Food-Only Index||Spread|
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