Let’s divorce ourselves from the notion that the PracticalDad Price Index monitors the pricing activity of a fairly typical family marketbasket from a grocery store – or three separate and unrelated stores as in the case of the Index. Let’s say that the figures represent an unknown something that could just as easily be good as bad. Now assume that the figures have risen from a baseline of 100 to a high of 115.33 over a period of 49 months, a rise carved with ups and downs but generally following an upwards trend. If you were to find that this increase over a 49 month period was eliminated by more than one half – 57% to be exact – in just six months, how would you describe it? A drop? A decline? A fall? A collapse? A crash? The wording can be argued but my gut response is that it would be akin to a crash, a sudden crunching of the upwards slope in such a way as to suggest that said curve ran headlong into a concrete abutment and folded in upon itself.
Such is the case with the June 2015 edition of the PracticalDad Price Index as the Total Index fell yet again to 107.11 in June from May’s previous reading of 107.56 (November 2010 = 100). This is the fourth decline in six months from the December 2014 level of 111.18. But whereas the Total Index covers all 47 items in the marketbasket, what has grabbed my attention is the simple collapse of the Food-Only Sub-index, which consists of the 37 foodstuff items within the larger 47 item marketbasket. It’s this sub-index (again, November 2010 = 100) which has historically shown the effects of price increases and decreases, while the non-food items have, for the most part, been generally controlled. The Food-Only Sub-index reached it’s zenith in December 2014 at 115.33; yet it subsequently began a steepening slide that led to June’s Sub-Index reading of 106.46. This is the crash to which I’m referring in the title – that fully 57% of prices increasing over four and a half years has been wiped away in six months. Yes, a pound of 80% ground beef is still high and the rising price of a dozen large eggs is starting to show the effect of the spreading Avian influenza through the national poultry flocks but these supply and demand issues are being played out against price declines in other foodstuffs as deflationary pressures come into play in a complex and dynamic process.
So what is this deflationary pressure and how is it playing out in the stores?
Understand that the price changes in inflation (upward) and deflation (downward) are symptomatic of other underlying issues and in the case of deflation, the biggest underlying issue is the amount of money flowing through the economy; in the case of most, that flow would come from the family income. The Fed, and other central banks, are terrified of deflation and want inflation. Their premise is that rising prices mean that producers and manufacturers can charge more for their products and then in turn pass that along to their employees via higher wages or hiring of more people – in the ideal world, both would happen – and these happy employees would feel wealthier and more comfortable. That would then lead to greater spending by the employees and their families, meaning that more would then flow back to the producers and manufacturers and the cycle would continue. The policy response of the central banks is framed by their predecessors’ experience during the Great Depression of 1929 in which deflation ruled the day. Businesses lost complete control of their capacity to maintain pricing as consumers lost their money and cut back on spending; as spending was curbed, less was bought and businesses were forced to lower their prices to compete with the result that the employees weren’t receiving higher pay. As they didn’t see wage increases and saw other businesses slowly shutter, they in turn cut back on spending further to protect themselves and businesses saw even fewer sales, meaning even more downward pressures. The result was a highly negative reinforcing cycle that culminated in a quarter of the American workforce unemployed and thousands of businesses and banks shuttered forever. So the ability to control pricing is key and that in turn depends upon the ability of people to spend and that ultimately depends upon people having something to spend in the first place.
That’s lovely…but how does that theory seem to be playing out in the grocery stores? What I’ve seen over the past several months appears to be significant changes in pricing strategy. The backdrop to all of this is that the median family income is dropping across the country and that’s compounded by the burgeoning number of Americans now receiving food assistance, so the money flow simply isn’t there as it was several years ago. There was a period within the past decade in which grocery stores upgraded themselves with coffee kiosks and delis, enlarging and appealing to a more upscale clientele. As the money flows out of the general economy however, people feel less inclined to spend and the cosmetic changes matter less and the stores’ ability to compete is increasingly reduced to bareknuckle price competition. During the first quarter, one grocery store in the survey, owned by an international chain, instituted an “Everyday Low Pricing” policy with a lower price on multiple common foodstuff items. Meat, a supply-and-demand affected item, was still expensive but from one month to the next, items such as bananas and potatos, canned vegetables, and other foodstuffs underwent significant price decreases. Approximately two months later, another grocer – an independent but one which whose generic brand is produced by a national chain on behalf of independents – began a wholesale switch to another generic brand producer and the prices on multiple foodstuff items underwent a corresponding decline. This particular change is still playing out in the store as they still sell the discontinued generic brand and will do so until their inventory is exhausted, at which point I anticipate that they’ll offer only the new generic label; it’s happened before and I expect it to happen again. The remaining grocer is a regional grocery chain and has had difficulty maintaining prices relative to the two competitors and until this month, I hadn’t seen much different in terms of their pricing. What I observed the other day during the pricing however, was a number of lower priced items in the marketbasket and in those cases, there was also signage indicating a new “everyday low pricing” policy. This was particularly the case with lunchmeat, deli cheese and bananas as the minimum drop amongst the three items was 20%. In the case of this third grocery chain, I know from first hand experience that they’ve had profitability issues and have dealt with it by closing stores and reducing hours at other locations. The evidence suggests to me that despite these issues, they’re having to compete with the others now on the price front.
So the evidence suggests that amongst the falling income/money flow through the general economy, the three grocers are now competing on a price front – much as their Depressionary forebears did 75 years ago. If this income situation isn’t somehow rectified in the relatively near future, the prospect is that the grocers will lose control of their pricing in a deflationary spiral and one or more will fail and the first will be that one which doesn’t have the sufficient buying power that comes from larger entities. For example, which would you consider to fail first – Walmart or Joe’s corner grocery? Because people aren’t spending and making money course through the economy, the prospect exists that one or more of these grocers will fail – and this fear of more failing businesses is the rationale behind the policies of the central banks. It is also the fear behind Wall Street Journal reporter Jon Hilsenrath’s likely to be infamous letter to American consumers.
One final note when you look at the Indices results from December 2014 through June 2015. The column entitled “Spread” pertains to the differential between the Total Index reading and the reading for the Food-Only Sub-Index. I began to use it some time ago since I found it helpful to indicate the level of activity on the part of the Sub-Index versus the entire Index. You’ll note that as of December 2014, the spread between the two readings was 3.95 basis points and was positive because the Food-Only Sub-Index had risen that much higher in comparison to it’s Total Index companion. But over the past six months, this spread has declined significantly and consistently until June 2015 when the spread was actually (.65), meaning that the Total Index was now actually higher than the Sub-Index…something that hasn’t happened before in the four and a half year history of the PracticalDad Price Index. Yes folks, food prices – as measured on a marketbasket basis – are now dropping.
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