Posted by: theoptimisticconservative | November 10, 2010

It’s the Increasing Prices, Stupid

I remember a funny episode from college.  It’s actually funny and telling on multiple levels, and I expect most of them will occur to most readers.  It was a wild spring day in an advanced course on statistical analysis (required for my Econ major), and as wind and rain whipped at the windows and students huddled over thermoses of coffee (this was back when what you did was fill up a thermos in the student union cafeteria between classes), our professor asked us for a simple definition of inflation.

I have never seen anything so hard to extract from a group of people.  (And I’ve been witness to some seriously impacted wisdom teeth.) The professor was very patient, but at fifteen minutes and counting he was beginning to get a twinkle of unholy amusement in his eye.  I think he originally expected us to come up with that simple answer in about 30 seconds.  But we didn’t.  I’d say almost half the class (which had about 30 people in it) had earnestly weighed in with some variant of “too much money chasing too few goods” or “monetary policy that devalues the currency” before he finally blew the whistle, metaphorically speaking, and gave us the definition he had in mind.

“People.  Inflation.  Inflation.  Prices go up.  That’s it!  That’s all I’m looking for.”

I don’t even remember what point he went on to illustrate with that idea.  But I do remember the collective burble of laughter among the students, at our solemn inability to give a simple, common-sense response.

This episode occurs to me as I follow the little drama of the Wall Street Journal, Sarah Palin, and Paul Krugman.  Inflation – no surprise – is their topic too.  WSJ’s Real Time Economics section fired the first salvo, taking Palin to task for warning of current inflation in her criticism of “QE2” – the Fed’s unwise “quantitative easing” of the dollar by buying up its own debt – in a trade association speech. Palin fired back, pointing out that WSJ itself had run a recent article on grocers having to pass along cost increases to consumers.  Prices, she observed, are going up.

The RTE crew lobbed one back yesterday, asserting (again) that the Labor Department’s tracking of inflation in food prices showed only a 0.6% (annualized) rise in prices over the first 9 months of 2010, while the Commerce Department’s figure was 1.3%.  These rates are low by historical standards.

Paul Krugman felt the need to join the fray with a blog entry today, which reads, in its entirety, as follows:

The Journal’s Real Time Economics, having had the audacity to point out that Sarah Palin’s attack on quantitative easing was factually challenged, gets a blast from the barracuda. As I read it, they seem somewhat shocked — it sounds as if they’re deeply surprised at being accused of villainy simply because they pointed out that the facts are somewhat at variance with what politicians on the right are saying.

Welcome to my world, guys.

But here’s the deal.  As interesting as federal department statistics and monetary management theory are, they’re not where the rubber meets the road in the economy.  The rubber meets the road at the same place every time:  where the consumer decides what to buy.  And at that decision point, which occurs in the trillions of instances every day, the prices consumers see are going up, and that’s what matters.

Consumers don’t have more money today than they had a year ago.  A very large percentage of them have less.  Many people today are seeing amounts as small as 50 cents matter to them, in a way they haven’t for 30 years or more.  I doubt that most Americans are very different from me and my family and friends; and what we are doing is effectively keeping inflation from being higher than it is by buying less of the essentials (and practically nothing else).  I stocked up on groceries this morning – an outing I am consciously stretching the intervals between – and can vouch that the price of almost everything I normally buy has gone up since I last bought it.  Some of the increases were substantial (e.g., a half-gallon of milk from $1.56 to $1.92).

The store has stopped carrying some brands – especially of locally-produced items like milk and bread – either because the supplier is no longer selling in this area, or because the store can’t charge enough to make that vendor’s product worth carrying.  Shelves are more likely now than ever before to have empty spots where stock hasn’t been replaced.  For most of my life, that has literally never been a problem unless there’s been a hurricane or other natural disaster.  Even Wal-Mart carries less stock than it used to.  Aisles that used to be impassable because of big, imposing center-aisle displays are wide and clear.  On two subsequent trips there, spanning a period of more than a month, I found the stock of Scotch-Brite sponges unreplenished, something I have never encountered before.

People are buying less, even of the things we can’t do without.  And still the prices are going up.  When the Scotch-Brite sponges finally showed up, they were priced at almost twice what I last paid for a 3-pack.  Now, smelly, disgusting old sponges have to be replaced – but these days that extra $1.50 in the price means not buying something else.

Of course, we can’t draw a straight line from the national debt and the Fed’s “quantitative easing” actions to the rise of 2010 prices for food and household items.  Many other factors come into play, like weather and crops and global demand for the energy inputs that go into our own production and retail industries.  But when people know they themselves are buying less, or not buying at all, price increases are clearly being driven by things other than demand.

If I had to offer a theory, it would be that inflation, as measured by the consumer price index, has been kept low by falling demand over the last two years.  This downward pressure on prices works against monetary inflation, and up to now has been strong enough to discourage the price inflation we would otherwise be seeing, not just because of the Fed’s current policies but because of decades of debt accumulation by the federal government.

Inflation figures may well be higher for the last couple of months than they were for the first 9 months of this year.  We’ll know that soon enough.  But two points are paramount.  First, it’s not at all clear that Sarah Palin was wrong to discuss current inflation in relation to the Fed’s inflationary monetary policy.  The Fed’s policy has been inflationary for several years now; the fact that food-price inflation was low through September 2010 doesn’t mean there’s no inflation, or that it’s nothing to worry about.

Second, common sense is what matters here.  Paul Krugman can’t make the economy improve by squeezing his eyes shut and wanting it really, really badly.  It takes the decisions of millions of people each day to make an economy improve.  Whatever he or the RTE analysts see through their stacks of statistics, what grocery shoppers – people who’ve lost jobs, who are upside-down on their mortgages, whose investment portfolios have been gutted, who are seeing no raises and no COLA adjustments, but who are facing higher taxes next year and higher premiums for health insurance – what these shoppers see is higher prices for meat and eggs each time they push a cart into the store.

Analyzing that reality out of consideration is like a bunch of students being unable to give a common-sense definition of inflation.  Shoppers don’t stand in the grocery store, holding a tray of chicken breasts priced 15% higher than they were a month ago, and think, “Well, the Bureau of Labor Statistics says that the annualized average rise in prices is only 0.6%, so the price on this package of chicken doesn’t really matter to me.”  In the end, the supreme economic tiebreaker is the human being, confronted with the price marked on the item on the shelf.  You can only ignore that factor for so long before there has to be a reckoning.  Sarah Palin has that right.

J.E. Dyer blogs at Hot Air’s Green Room and Commentary’s “contentions.  She writes a weekly column for Patheos.


Responses

  1. Yup, sarah palin is feeling that 15% increase in the price of chicken cutlets more than anyone.

    I kinda wonder if your theory that prices for groceries have been kept low because people aren’t buying them can hold water for a year and a half.

    People don’t stop eating quite that long.

    They substitute food items, not long forego them entirely. Agg demand stays flat.

  2. All I know is that when the wife sent me out to bring home the bacon today I was shocked by the $6.98 a pound that our local market wanted for the Oscar Mayer. The price of elevated cholesterol is going up even if nothing else is.

    But, of course, the consumer price index is and elaborate statistical charade when it comes to the day to day budgets of whole segmets of the population. The prices of a lot of everyday things that you buy for cash have been going up right smartly over the past few years even as implied rent, or whatever they call the cost of living in your own house for price index purposes, has been going down as the value of your house has declined.

  3. The value of a large house hasn’t declined much around here.

    Bacon, though, appears to be following the upward price trend in “concentrated calorie” foodstuffs. Old books, high in fiber, may become too valuable to burn.

    • It’s nothing like Florida, Nevada or California here in eastern PA; but large detached houses have dropped by almost a third, when they sell. The sellers in the ten to fifteen year old neighborhood next to us have to be getting killed at best.

      As to books; they continue to burn quite nicely. I use them only for kindling though; because they leave too much ash relative to cherry and apple, causing me to have to dump the ash drawer more often.

  4. How does anyone argue that putting more money into circulation doesn’t lead to inflation–scratch “lead to,” it IS inflation. Of course there are various ways it can be masked for a while. But 90% of leftist thinking involves trying to convince you that what you see in front of your eyes and what common sense says is self-evident is really prejudiced, vicious nonsense.

    • The dodge is that the Fed is promising to soak up dollars by selling bonds out of its inventory when inflation rears its head. But hidden up its sleeve is the wild card that selling its inventory bonds even as the insolvent Treasury sells new bonds to finance the deficit will drive interest rates to the sky.

      I think the decision has been made to work out the insolvency by devaluing the currency. The big question is whether the Fed can work things out to achieve a moderate 8-10% inflation rate for a decade, or whether it will lose its handle on things and set off a much faster and sharper inflation ala Israel back in the 1980’s (I think it was). I’m assuming their smart enough not to set off a real hyperinflation.

      • “I’m assuming their smart enough not to set off a real hyperinflation.”

        And I thought you were a sane, rational individual, Sully.

        • You do have a point. One should never underestimate the potential for idiocy of government officials.

          • Forget idiocy, I’m thinking malevolence

  5. TOC,

    I know this isn’t the subject of your post and I feel a little silly with this reply, but here goes:

    If you microwave your sponges (make sure they aren’t completely dry!) it will sanitize them, which also removes the smell.

    fuster is fortunate that his financial situation enables him to scoff at your assertions. I can tell you, as a self-supporting student (econ major as well), that microwaving sponges is sadly my reality. I stopped buying milk a few months ago and juice a few weeks ago. I’ve even turned to using ammonia in the wash instead of detergent.

    I guess he makes one good point though. I’ve been buying a lot more 10 lbs. bags of potatoes.

    • Fuster has a separate illegal alien, excuse me, undocumented, maid whose sole duty is to microwave his sponges, except on Cinca de Mayo, which is her only day off. Naturally she microwaves the sponges late on the 4th of May and again very early on the 6th in appreciation for that privilege.

      • I understand that’s beem changed to Cinco de Quatro, Sully. Do try to keep up. (I’m not sure how the transformation affects the sponge-microwaving schedule of fuster’s maid.)

        Would that it were still possible to resurrect my old sponges by microwaving them. Alas, before the Scotch-Brite stock was finally replenished at Wal-Mart, the old ones had become so disfigured as to be unrecognizable.

        • 3M make very good products and do not discount them much. They’re overpriced compared to alternatives. Forget Scotch_brite. Buy regular sponges and keep them dry between usages. Treat them with an occasional infusion of 4-way disinfectant.

          Obtain a worn floor polishing pad (or two) and cut them into hand-sized bits. Works a treat and lasts far longer than any backing material on a sponge.

          These and other household savings tips available in my never-to-be-published ….

          And. also, don’t buy houses that you can’t afford in the first place. You can tell that you can’t afford them if you haven’t saved more than half the purchase price and don’t have a reliable yearly income equal to the other half.

          And, yes, Fuster did have an illegal living in the basement. He’s still there, now legal, and enrolled in med school.

  6. Anecdotally, I too have been more conscious of costs over the past year or two in cases where I never was before. Not that it needed much of a boost, but that has stiffened the spine of my libertarian streak. I feel quite confident that if the state wasn’t digging its fingers so deep into our daily lives, there would have been no financial collapse to set off the chain of events that’s causing us to worry about that extra .50 cents for the milk.

    Off topic, I’d like to say Happy Veteran’s Day to all those vets out there. More specifically, J.E. for one of course, Geoffrey Britain too (if you’re still out there GB!). And sully as well?? I seem to recall reading that you served in Vietnam sully. If so, many thanks.

    I partially performed my traditional small part of honoring our vets by watching the first half hour of Saving Private Ryan before coming into work this morning. I’ll watch the rest of it tonight. Every Veteran’s Day and every Memorial Day I watch SPR to honor those who have served. A close friend of mine does the same.

  7. Yeah, this is one where Palin gets to the heart of the matter and all the experts kind of miss it.

    I do a fair amount of the grocery shopping and I have begun to see some items really begin to take off in price. Butter moved almost 80% in a week – perhaps they decided to quit using it as a loss leader, I don’t know. And there are more examples that that of course.

    We all know – including Krugman, and the WSJ – that the action being taken by the Fed and Treasury is an inflationary measure to compensate for the fact the business environment created by our current political leaders is a joke and that their policies are to blame. So when you are unwilling to accept your responsibility for the carnage you try to buy people off.

    I realize the WSJ folks are making a statistical argument, which has truth as far as that goes. But it is a little bit like the CBO costing ObamaCare. The bill was written in such a way that it forced the CBO to show it as a savings. No one believes that, absent massive rationing, this will reduce the cost one bit. In fact after the fact we know what the chief actuary of CMS has said.

    Palin (and btw way I do not believe she can win the 2012 presendential election) once again shows the bettter street smarts and understanding of how the real world works. Palin 1, WSJ 0.

    • I appreciate your thanks, JEM, even though the relative risks I ran were nigh unto trivial. Considering the way I drove and indulged in alchoholic beverages for my first few driving years I was probably far safer in the destroyer shelling the bad guys from off the coast of Nam, and I was certainly safer while in the carrier. Not so for the ground pounders ashore whom we were supporting, of course. Especially the ones actually at the head of the spear.

      Even most of them would be humbled by a visit to the sunken road and Marye’s Heights just behind Fredericksburg which I had a chance to walk around on Sunday. Insane though the 1862 attack at Fredericksburg was from a command perspective one must honor the men who advanced time and time again against that position as part of the effort to preserve the union.

      With respect to Sarah Palin I’m with you 100%. I greatly honor her for what she has helped catalyze and achieve in this election; but watching her occasionally on Fox News I simply can’t see her sustaining a campaign that will win 51% of the electoral college.

  8. More on that topic here, including a link to St Louis Fed’s food/beverage-prices chart in the combox:

    http://dad29.blogspot.com/2010/11/no-job-no-problem-well-starve-you-too.html

    SOMETHING is going on in grocery-retailing and it’s not positive. Worse: this is all happening before the effects of the really dramatic commodity-price increases of the last ~90 days.

  9. Many thanks to our gracious hostess whose thoughts I often link on my Facebook page. We have much to celebrate these days. Revitalizing our country, restoring sanity, regaining our sacred freedom to both succeed and fail honors our fallen veterans, the ones who gave their all.

  10. At this point, some of the efffects of inflation are being masked by businesses cutting prices in order to stay solvent. On a short trip last weekend I noticed that the motel charged 30% below the price it originallky quoted, and that was for Friday and Saturday nights. The place was empty. I see lots of deals on shoes and clothes, too.

    But at the grocery store especially imported foods (Droste’s cocoa for instance) are up 10-20%. And gold prices are climbing.

    People know that we have a massive debt and that the government will “pay off” a good portion of it by printing money. This is where I came in during the Carter years. I then had a young child, was trying to save for a down payment for a home, college, and a retirement account, and had to watch those little savings shrink every quarter. Also had to watch the U.S. take a million insults in the international theatre, including waiting passively while the Swiss made occasional requests of Iran to permit them to interview our captured diplomats.

    It’s bad bad bad seeing the same ordeal visited on my daughter.

    Honor and thanks to JED and the other vets here on their day.


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