Practical Dad

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

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