Resurrecting the Price Index: Rationale

We are again in Terra Incognita and our only guides are a few accumulated studies of a hundred year-old predecessor pandemic.  This is like trying to find the most efficient route from New York to Salt Lake City using a 1932 Rand McNally map.  The fear is palpable and not least of which is the concern about the national food supply, especially since John Tyson of Tyson Foods took out full page ads warning that the food supply chain was breaking.  While this piece was going national, there were also warnings about the virus having an inflationary impact on food prices.  Are there serious problems?  Absolutely.  Are they as terrible and fear-inducing as it appears?  Not necessarily.

Societal shocks happen and they are always followed by fear, if not outright panic.  Our history is that we have had problems with food prices and supply before, most notably during the Second World War, and we managed to survive.  What is different is that Franklin Roosevelt’s government had sufficiently advanced notice that there would be another war and had begun thinking ahead.  Today?  Well…that depends to whom you are talking.  The simple reality is that there are no easily ascertainable data points to assess developments at the retail grocery level and the lack of data feeds uncertainty and fear.

This is why I am resurrecting the original PracticalDad Price Index – which I calculated monthly from November 2010 to September 2016 – and modifying it to follow activity within the grocery stores.  The original index was created as a kitchen table project to ascertain the impact of the Federal Reserve’s novel Quantitative Easing programs upon food prices in my vicinity.  It was calculated both to satisfy my own curiosity and to serve as a small data point for a larger online community.  It’s one thing to read wonkery, but another to actually see it in concrete terms.

The modified market basket, methodology and results will be covered at length in the next article.  For now, let’s go from pondering questions of inflation at the molecular level of three local grocery stores to a more global perspective on prices and inflation.

Understand that inflation is simply the decrease in a currency’s value, as measured by it’s purchasing power for goods and services.  There are three principal reasons for this.

First, there is demand, such that people are willing to spend more for that item with the supply of that item being relatively constant.  The stunning rise of a single Bitcoin is an example of that but that glorious moment in our history when Americans believed that a house was an ever-increasing investment works as well.  Our realization that a house wasn’t so is a good example of the inverse, deflation.

Second, an inflationary or deflationary effect can arise out of a good’s supply.

The oil supply shock of the 1973 OPEC oil embargo caused prices to spike simply because there was an immediate halt to the flow of oil to the US with no corresponding decrease in demand to offset it.  In economics parlance, this was a simple shift in the supply curve to the left with demand being equal.  The shift from Intersection A to Intersection B resulted in a rise from a price of P1 to a price of P2.  Real life, unfortunately, was quite a bit messier.

Finally, the purchasing power of a currency can be affected simply by the sheer amount of money available within the system.  What most have forgotten is that inflation for food – particularly meats – was already an issue prior to the 1973 Embargo.

There were calls by housewives for “Meatless Meals” as a push-back against grocers and protests broke out across the country.  Housewives blamed grocers and the grocers pointed their fingers at farmers, who kicked the can of blame to the feed producers.  Where did the final responsibility rest amidst this idiot firing squad?  Actually, it was a result of the persistent and signficant increase in the amount of money within the economy starting in the 1960s.  The Federal Reserve itself terms that era as The Great Inflation and notes that the period began in 1965 and ended in 1982.  Why those years?  Because 1965 saw the beginning of LBJ’s Vietnam build-up as well as the inception of his Great Society programs.  And 1982?  That’s when then-Fed Chairman Paul Volcker turned off the tap and ratcheted interest rates to nosebleed levels to rein in the resultant inflation.

There is nobody – absolutely nobody – who can tell how this plays out in the grocery aisles.  There are competing articles about incipient inflation and incipient deflation, which is really where the mass of Americans have been stuck since 2009.  So take a side and argue away because each argument has merit and honestly, the act of arguing serves nothing better than to satisfy a primal intellectual urge, a form of mental masturbation.

What this C-19 Pandemic has managed to do however, is create a situation in which all three factors are now simultaneously in play amidst the real economy.  In the short term, the supply of specific food groups is curtailed and all things being equal, there should be a spike in the prices for those groups.  But all things are not equal here because while there’s the supply question, the American people have suffered a cataclysmic – and that’s an appropriate word for these circumstances – demand shock in loss of income, strained as it already was for the past decade.  Refer back to the Supply/Demand chart shown above.  The family income supported Demand curve hasn’t so much been shifted left as it’s been tossed into the bottom corner like a broken corpse.

Our present drama is playing out amidst these first two factors of compromised Food Supply and cratered Family Income, contesting one another like fighters in the late rounds of a championship bout.

But the third factor, the Money Supply, is waiting quietly outside of the ring and that is what literally awakens me on the occasional night.  In the wake of the 2008 Financial Crisis, the Fed’s three QE programs created trillions of dollars and in the process extended the Fed’s balance sheet to amounts previously unimagined.

Growth in M1 (1975 – 2015)

That it didn’t tear Joe Six-Pack a new one is a testament only to the fact that the economic, legislative and electoral policies since the repeal of Glass-Steagall literally created two stand-alone economies:  one awash in wealth for the uber-wealthy and another that diminishes the American Middle Class a little bit more each day.

My wife once asked me, if the goal was to create inflation, where is it?  The inflation is there.  It is encased in the equity markets and the prices for exclusive properties in places like New York, San Francisco, the Hamptons and Potomac, Maryland.  It is encrusted in the wealth accrued to billionaires and near-billionaires and their purchases of art, excess consumption and doom shelters in New Zealand.  It is wrapped up in projects such as Jeff Bezos’ effort to create a ten thousand year clock as a monument to long-term thinking, the vicious irony being that it’s financed by a predatory reliance on short-term quarterly results.  And the inflation is locked away in the purchases of items of alternate value such as cryptocurrencies and precious metals, which are now physically almost unobtainable despite having a stable paper price.  Go figure that one out.

As global economies pursued this race to the bottom with their respective currency values, the Fed acknowledged that it had to begin raising interest rates to something remotely approaching historic normalcy.  It’s not surprising that the stock market became cranky during this period because it’s flow of cheap credit was threatened.  There’s a reason that President Trump demanded zero and negative rates from the Fed, regardless of the damage that these rates do to real activity.  But in the immediate aftermath of the Pandemic’s onset, the response was to salvage the economy by again dropping rates and extending lifelines to a wide variety of corporate and financial entities.  The result of these lifelines from the government and the Fed?  $6 Trillion in the course of the two month period ending April 15, 2020.  That money is now coursing through the bond and equity markets, which have stabilized since the roll-out of the various programs.

Yet the average American gets a one-time check of $1200 with an additional $500 per child.

At the end of the day however, our economy is built upon the premise that Americans must spend for any recovery to happen.  That’s why the Administration pushes to get the economy re-opened and money flowing, even though the infection and fatality numbers in many areas still fail the President’s own criteria for re-opening.  That is why we hear establishment commentary conflating legitimate saving with ridiculous terms like “hoarding cash”.  Sure dude, I can’t cover a $400 car repair but yeah, I’m good for a beach week to help the economy.  Ultimately, the average American will not be able to consume unless the Federal Government renders real and meaningful assistance and the two bifurcated economies are rejoined in even the loosest fashion.  Whether it is debt relief, guaranteed income or any number of other programs that remove the noose from the neck of the 99% and/or ratchet down upon the 1%, the economies must be rejoined and a re-balancing must take place.

That’s when the trillions of dollars set loose since 2009 are liable to return.  If it happens, that money will begin flowing through the real economy and we will be set up for a replay of The Great Inflation, except that the Americans of this generation won’t have the financial health of their great-grandparents to survive.  The resultant inflation will ignite and what we witness in the next year will be child’s play in comparison.

It is possible that these fears won’t be realized.  But make no mistake that the American economy – and the political body – is seriously ill.  One of the criticisms of the repeated actions of the Fed’s QE programs is that it’s akin to treating cancer with copious amounts of painkillers.  The patient feels better but the cancer continues unabated.  At some point, the treatment must occur in all of its unpleasantness.  As a survivor of cancer and any number of other medical issues, I attest to the value of a painkiller in the moment; I also understood in the moment that my survival was predicated upon a simple submission to the treatment and all of the side-effects.

Apart from the sheer ability to draw breath for yet another day, there’s an upside to survival.  It is the understanding that despite the worst fears in the moment, they are at that time, only fears and not guaranteed realities.  You learn to acknowledge the fears and set them aside, managing your life one step at a time and taking each step as it comes.  The fears are there.  They are real.  But until they actually occur, they can be managed one step at a time.

So it will go in the grocery store.  We will manage as best that we can because that is ultimately all that we can do:  our best.  In the meantime, I will work to put a recognizable face to the abstract notion of the cost of food and the reality of the supply chain.  That will be the next article:  The new Market-basket.

 

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