When I began the PracticalDad Price Index in November 2010, there was significant controversy over the outcome of the untried experiments of the Fed’s Quantitative Easing: would there be a rocketing ascent into a massive hyperinflation or would the economy collapse into a deflationary black hole? Given the speed with which opposing events occurred both in the Weimar Republic’s Hyperinflationary spiral in the early 1920s and the Great Depression in the early 1930s, it was generally supposed that whatever occurred would be quick and massive. But we’re now more than five years from the onset of the Index and the third and last QE program has finished and it’s only now that prices are moving far more quickly in one direction than the other. In this case, downwards.
The index began with a baseline of 100 as of November 2010. The 47 item marketbasket, priced at three separate and unrelated grocery stores, consisted of 37 foodstuff items and 10 non-food items commonly purchased at the grocery (soap, kitchen trash bags, aluminum foil, ibuprofen and the like). From this data each month was derived the Total Index (November 2010 = 100) and the Food-Only Subindex for the 37 foodstuff items (again, November 2010 = 100). While the QE programs existed, both the Total Index and the Subindex rose upwards, although not at a constant or large rate. The Food-Only Subindex actually peaked in December 2014 at a reading of 115.13; the cost of the consistently priced average basket had maxed at 15.13% higher than at the inception over four years previously. But since then, the Subindex has dragged the Total Index downwards at a stunning rate. As of the November 2015 data collection in the three stores, the Subindex has again dropped from October’s level of 107.07 to 104.79; this is a full 68% decline from the high reached eleven months previously.
Here’s some perspective: it took more than four years for a consistently priced market basket to reach a high 15% above it’s starting point. And it’s only taken less than a quarter of that time to give back more than two-thirds of that increase.
So what’s behind the collapse in the market basket’s food prices? This is absolutely deflationary, but why?
Understand more than anything else that inflation is not a monolith. It might be a wild beast when utterly untamed, such as in the 1920s German Weimar Republic, 1990s Zimbabwe or even today’s Venezuela…but it’s a Hydra and each head is one of the various sources of price increases. One source of price increases comes from hot money flowing into a particular area of the economy, such as San Francisco in the years prior to 2006. There’s only a limited supply of something – San Francisco properties – and everybody with money has to have some, so prices go up. Until they don’t any longer. Another source is when there are only a limited number of significant suppliers of a particular item and one or more decide to raise prices to pad the profit margin. This was the case with Kimberly-Clark raising the price of adult diapers because they wanted to pad the profit margin. This is also now the reason that housing rental rates are higher and growing moreso as the predominant American landlord is no longer some Mom-and-Pop but instead Blackstone Investment Group of downtown Manhattan. Have you ever seen the neatly printed yard and corner signs offering a toll-free phone number and a standing offer to buy your house for cash? Have you ever wondered who that is with all of the cash? That’s Blackstone, at least in my neck of the woods.
But the biggest head on Hydra is the money supply, most notably measured in Economics by both velocity – the number of times that a dollar is turned over in the economy during a specified timeframe – and family income. We all know that family incomes have declined but the monetary velocity for the supply of money (M2 as measured by the St Louis Federal Reserve Bank) has decreased to lows unseen in the lifetimes of most Americans. When a family gets a dollar, they will now sit on it, far moreso than in the previous six decades.
So apart from housing, what is the other principal category upon which a family spends it’s money? Food. And it’s here amongst the thin-profit-margin grocers that deflation truly seems to be appearing. The grocers – corporate and independent alike – understand that their customers are stretched and are doing all manner of change to maintain sales and profits. The Fed is terrified of a return to Great Depression-style deflation because the businesses lost all control of pricing as money disappeared from the economy and went out of business. Today’s competition amongst the grocers is no longer based upon upscale stores and coffee kiosks but instead pricing, and bare-knuckle at that. When a supplier is deemed to no be longer able to provide a cost-beneficial product, that supplier will be replaced by another that will; this is perhaps the key reason that the prices in the three local grocers are declining.
One of the parameters of the survey since its inception is that unless unavailable, all products within the PracticalDad market basket are store brand items. If one of the three did not have a store brand item, then I shifted to a name brand across all three but that’s only occurred in a handful of the surveyed items. The idea behind the parameter was that budget minded shoppers will generally forego a name brand in favor of the store brand based upon price considerations. It is also far more sensitive and responsive to prevailing economic factors than the name brands’ manufacturers, who usually have the financial strength to absorb periodic downturns. One of the grocers surveyed completely swapped it’s store brand supplier for another several months ago and across the line of products within that store’s basket, the prices declined. What occurred this month was that another grocer found an even cheaper supplier and introduced some items from that supplier alongside their store brand products. There’s been a tie-breaking rule that I adopted at the outset of the Index project in late 2010 and have used only rarely since: in the event of any question, what would a true budget-driven consumer do? I invoked the rule this month and used the lower priced item, even if not a store brand; the file has been amended and this grocer’s items will be used in lieu of the store brand products. These items at one grocer were the movers behind the Index decline and should the same situation occur again, the rule will be invoked again. So that is why we stand where we stand at the moment. Families must stretch earned dollars and food benefit dollars further to stay afloat and it’s here at the most local level, the grocery store, that the stretch is occurring. Because the grocers have competition to meet for the dollars and none of them will throw a family to the curb when the rent isn’t met.