The April 2015 PracticalDad Price Index was completed and compiled in the first days of April and the results show that – for now, at least – the collapse in the marketbasket prices from December 2014 through March 2015 have stabilized, increasing slightly from March. April’s Total Index for the 47 item PracticalDad Marketbasket stabilized at 108.21 (November 2010 = 100), up from March 2015’s Total Index reading of 107.89. The 37 foodstuff items that comprise the Food-Only Index in April stood at 110.20 (November 2010 = 100), up slightly from March’s reading of 109.50. Note that especially regarding the 37 foodstuff items (for a complete list, see here), the drop over the four months from December 2014 through March 2015 accounted for fully 37% of the index rise over the previous four year period since the Index’s inception in November 2010.
What arrested the decline was the increase in the seven item Meats category, as four of the items rose at an average clip of 9.5% from the previous month. Surprisingly, a pound of 80% ground beef remained stable at $4.32 while chicken, deli ham and hot dogs rose significantly. When you remove these four increases, there was an equal number of price increases and decreases (6 each) amongst the remainder of the marketbasket items. Given that the meat category is highly affected by the effects of supply issues, especially PED and the drought, a cursory removal of those supply issues would indicate that the remainder of the 47 item basket indicates that deflation continues to prevail in the economy.
Since deflation is precisely what the Federal Reserve is working to stop, it’s helpful to look at what the monthly pricing excursions and results are showing. Understand that what scares businesses and the Federal Reserve so much about deflation is that it erodes and destroys a business’ ability to maintain and control its own pricing structure; money flows from the economy, leaving people with less and the consequent result is that businesses must continually cut their own prices to maintain sales. Let’s take a look at the workings of the monthly pricing to gauge this. I price at three separate and unrelated grocery stores: one owned by an international grocery corporation, another owned by a regional American chain and finally, a fully independent grocer. Because one of the original tenets of the index is that the cost-conscious buyer will purchase store-brands whenever possible, a significant portion of the marketbasket is composed of store-brand items. As money continues to flow out of the Main Street economy and the middle class is winnowed away, sales volume declines and prices decrease in order to maintain sales. The news that for the first time, restaurant sales were larger than grocery sales nationally means that there is now additional pressure on grocers; forty years ago, they competed with one another and starting maybe a decade ago, they had to begin competing with Walmart as well. Now they have to compete with restaurants as the younger generation shifts its spending back to inexpensive dining out instead of cooking. Given that more and more of the Millenials are now having to live at home with the parents – a largely unwelcome event – they are gathering together to eat out instead of sitting in the old family kitchen spending even more time with the ‘rents. The upshot is that while there are certainly situations which lead to price increases, such as the diminished supply of the national cattle herds, the composite activity indicates that overall, deflation is occurring. Amongst the three sampled stores, the most substantial price decreases occur in the internationally owned store, followed by the independent grocer and then the regional chain bringing up the rear. What does this suggest? As with Walmart, the international chain is able to order and purchase in significant enough quantities that it can force producers to accept lower revenues. Although the independent grocer is a small one-store operation, it is also affiliated with a national generic brand that supplies an untold number of independent stores across the country with a substantial purchasing power. Because the regional chain simply doesn’t have enough stores, it is unable to command such and the result is that the store’s marketbasket prices are generally higher each month. I can also attest from anecdotal evidence and observation – buttressed by a periodic review of the financial media, that this regional firm is suffering from greater financial difficulties than its two competitors.
As a commenter from Calculated Risk once noted about deflation several years ago: In the early days of the Depression, a candy bar cost a nickel. By 1931, you could get three candy bars for a dime and by 1933, nobody had a dime. So money is flowing away from the real economy as we speak and while some prices increase due to true demand and supply, prices are dropping on a composite basis. We’ll have to see how long this can continue.
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