The Federal Reserve’s accommodative monetary policies of the past several years have been intended to spur a mild deflation in the hopes that it kick-starts underlying real economic activity. It has also led to an ongoing debate about whether we’re going to see real inflation or the dreaded – at least to the central banks – deflation instead. On the street level, it’s hard to see exactly what’s going on as fees increase and the price of a gallon of gas rolls around at a 20 cent clip over the course of a single week. So since November 2010, I’ve tracked the cost of a 47 item grocery marketbasket at three separate grocery stores that might be purchased by a theoretical family. On the street level, deflation is winning out and in February 2015 delivered a quality body slam to the inflationary expectations crowd as the Total Index of the 47 items dropped from January’s 111.32 (November 2010 = 100) to February’s 109.42. There’s a Food-Only Sub-index of 37 foodstuff items within the basket and that component saw a similar drop of 1.92 points (January’s 114 to February’s 112.08) over the same period. This is akin to cliff-diving when you consider that the 37 item Sub-Index was at an all-time high of 115.13 in December 2014, only two months ago. So over a two month period, the Sub-Index has dropped by more than 3 full points.
So where is the activity happening?
First, there was a bit of a head fake in January when one of the grocery stores saw a price spike of more than a third in their store-brand eight-roll packs of paper towels, which contributed to the Total Index rise that month. However, this same store saw a newer, slightly different store-brand eight-roll package in February at a price akin to the first price while the original eight-roll package was still available at the higher price. Since my standing rule over five years has been, when such occurs, to go with the lesser cost item as the majority of cost-conscious consumers on a budget would, I opted to now use this lesser-priced item in lieu of the more expensive option. My suspicion is that this lesser priced package is of lesser quality and an example of stealth deflation.
From a foodstuff basis, there have been significant price declines in the cost of certain basic foods. Since December 2014, the price of a gallon of 2% milk has dropped from $4.22 to $3.74 (11.4%) and the price of a dozen large eggs has also dropped from $2.62 to $1.99 (24%). The price of a pound of sliced cooked deli ham also declined from $6.16 to $5.99 over the two month period. I was expecting to see a more significant drop in the price of commodity related items such as sugar, canola oil (which is also used for biofuel and linked in price movement to that of oil), coffee and aluminum foil but that didn’t pan out as only coffee saw a minor price decrease over that period.
So what is the upshot? From my perspective in the grocery aisles, deflation and falling prices are generally taking hold. There might be actual increases due to legitimate supply and demand issues such as the western US drought, but the inflationary policy is losing out, Bigtime.