PracticalDad Price Index – February 2014:  Deflation is Taking Hold

The pricing data has been collected and reviewed and although there’s a minimal increase in both February’s Total and Food-Only Indices, I was actually stunned by the price activity for food items in one of the three stores surveyed.  In this particular grocery chain, six of the 37 food items (16% of the surveyed products) had price declines greater or equal to 14%; the four canned vegetables each had a price decline of 20%.  While they are individually impressive, the nominal impact is small since these items do not constitute an outsized portion of the PracticalDad Price Index Market Basket.

The monthly results are listed below:

Month          Total Index          Food-Only Index          Spread

11/13            107.83                 112.81                             4.98

12/13            109.35                 113.41                             4.06

01/14            109.30                 112.39                             3.09

02/14            109.64                 112.46                             2.82

Both the Total and Food-Only Indices increased slightly in February (11/2010 = 100) from January, although the Food-Only Index is still well below its high of 114.33, reached in December 2012.  But while the indices show stable pricing, it’s the result of pricing at one of the three stores that truly surprised me as more than 6 of the 37 Food-Only basket items – a rate greater than one in six items – showed a monthly price decline greater than 14%; in fact, the four canned vegetable products each showed a non-sales price drop of 20% as each fell from a January 2014 price of $.99/can to $.79/can.  The two month results for the six food items is listed below.

Item                              1/2014          2/2014          % Decrease

20 oz loaf bread        $1.19             $1.00             16

Peanut Butter              4.29               3.69             14

Peas (can)                      .99                 .79             20

Green Beans (can)       .99                 .79             20

Diced Tomatoes (can).99                 .79              20

Corn (can)                      .99                 .79             20

So what’s the difference here versus other months, when there is always movement of some or another basket item to the downside from one month to the next?  Why should this particular situation be different? From my perspective, there are some specific issues that make this occurrence not only different but actually an indication that deflation is actually beginning to take hold within the economy.

Start with a simple description of inflation provided several years ago by a commenter named Dryfly on Calculated Risk, in which he described deflation from that period as: We could get a candy bar for a nickel and then a year later, get three candy bars for a dime.  Two years later, nobody had a dime.  The upshot of this excellent description is that deflation is not fully a function of price declines, but that the declines are part of an effort by producers to coax money from an increasingly tapped consumer; at some point, deflation is also a function of a lack of income/money flowing through the system.  Please bear this description in mind as we move forward.

The first issue pertains to the nature of the items in question, which are listed above with their January 2014 and February 2014 results respectively.

Each of the items is generic and within the control of the grocery chain, unlike brand name products like infant formula and women’s feminine pads.  The brand name products are manufactured by only a few companies and the various manufacturers have the comfort of knowing that they do have some control because there are fewer competitors.  It was in October 2013 that Zerohedge noted that Kimberly Clark management announced that they’d be increasing margin profitability by decreasing package sizing – stealth inflation– in step with their competitors.  The companies understand that they can do these things because while there is competition, the markets are limited and the options to those correspondingly limited; Hey guys, there are only so many alternatives for you out there, so heeeeeerrrrrree ya go…

The second issue is the financial health of the grocery chain within which these price decreases occurred.  I’ve noted anecdotal evidence that the chain is struggling and a cursory Google search for that chain’s most recent results showed that the financial figures for the 3rd quarter of 2013 were down from 3rd quarter of 2012.  Sales slid 1% and net income dropped almost 33% in that year-over-year basis.  Of the five grocery chain locations within a half hour distance from my house, one closed approximately 15 months ago and another, located in a lower-income urban area, announced that the store would no longer be open on a 24/7 basis but would instead close at midnight effective February 1, 2014.  Of the other three, one is in a clearly rural area and only two are in solidly "middle-class" neighborhoods.  I also personally know a young acquaintance who works as store management at a more distant location and he’s being forced to put in far, far longer hours because they won’t hire additional management to assist him.

If the customer base can no longer support the sales, then the chain must do whatever is necessary to stay afloat.  Store closings?  Check.  Store hours shortened?  Check.  Making do with fewer employees?  Check.  Increase special sales and circulars?  Per the noted Google article, check.  When all else is failing, begin to cut prices on products within their control in order to increase sales?  Now, check.

Remember that price is nothing more than the point at which a seller is able to sell her product to a prospective buyer.  In the huge number of transactions that come from grocery shopping, this is a highly impersonal point and most simply pay the marked price or wait until it’s on sale.  But if the seller can’t move the product, then the price must decline to a point at which a buyer is willing or able to part with money for the item.  If the seller can control nothing more than the price, such as with generic groceries, and must lower their price to the point at which buyers are willing to pay, then the seller is losing control of the pricing mechanism.  This is a key symptom from the deflationary Great Depression of the early 1930s.  It is countering this deflation that is at the heart of the monetary actions taken by the global monetary authorities since 2008.

While some brand name prices might increase and the other stores remain stable, what’s occurring at this particular grocer is deflationary.  As incomes drop, money is being sucked from the real economy and families are having to make greater distinctions about how much to spend and where to shop.  The number of available grocers is being culled as weaker chains are forced to give ground on all fronts, including regular prices.  When everything fails, then that grocer will be forced to shutter the doors permanently and the focus will go to the next weakest grocer.  This process will continue either until a new family income equilibrium level is reached or all of the grocers finally go broke, which is in effect a total collapse of the supply chain. 

So remember the takeaway from all of this.  We don’t have deflation because prices are going down.  We have prices going down because the supporting incomes are declining as money is being sucked from the system; in this case, the family incomes. 

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