Posted by: theoptimisticconservative | January 26, 2011

Reminder: It’s Not Inflation if It’s Just, Like, Prices Going Up

An e-acquaintance alerted me today to a Wall Street Journal article discussing the reasons why government estimates of inflation are to be taken with a truckload of salt.

I’ve read about these factors before, as I’m sure many of you have.  But it’s always good to be reminded of them.  The WSJ piece gives this memorable example:

Under the official calculations, if steak prices boom, the government just assumes you buy cheaper hamburger instead. Presto—no inflation!

In other words:  if you can still afford one type of meat, the “price of meat” is not an inflation factor. The obvious pop-culture allusion is to the Ally Bank commercials in which “even kids know” they’re being given the run-around.

But what’s odd to me is what seems like the collusion of the manufacturing and retail industries in maintaining the fiction of low inflation.  I’d love to hear from someone in industry on this topic.  What is behind the strategy of repackaging smaller amounts of the product in order to sell them at or near the old price?

I can make educated guesses, of course, but I’d still like to hear from people in the business.  The phenomenon is observable in almost every packaged item I buy now at the grocery or discount store.  I think it was sometime last year that Northern toilet paper was narrowed, by about an inch across.  The rolls have the same number of sheets, but the sheets are narrower.  I buy toilet paper in bulk at Wal-Mart, and when the Great Narrowing first occurred, the price of a pack of 24 double rolls was dropped from $13-something to $12.00.  Now it’s back up to $13.42.

Stay with me here, if you would.  Quite obviously, the ultimate point of this exercise was to change the consumer’s expectation about the size of a sheet of toilet paper.  Northern and Wal-Mart could simply have raised the price on the old product, but they didn’t.  The product is different now.  What drove this?  Why is this the choice that was made?

Likewise with a box of stove-top macaroni and cheese.  I was startled, a few weeks ago, to open a standard-size box and see how little macaroni there was in it.  It was so surprising that I went to the trouble to inspect the box for clues.  The box is exactly the same size it has always been, with the same logo and other information, but instead of containing “8 ounces” of macaroni it now proclaims that it contains “7.25 ounces.”  (I’m reasonably sure it contained even less.)  The box, a store-brand generic, was sold for the same price it’s been for as long as I have been buying the product at this store.

I don’t buy soda very often, so when I picked up a 16-ounce bottle at a convenience store a couple of weeks ago, I was again surprised to see that it was noticeably less full than such bottles have previously been. I don’t keep track of the price of this kind of item, so I can’t comment on that aspect of the transaction.   But there was unquestionably less Coca-Cola in a 16-ounce bottle than there used to be.

The list goes on and on; these are just samples.  I wonder if other consumers are as curious as I am about whether laundry detergent has really become so magically effective that one can truly do twice as many loads with a smaller jug for which the retailer charges more.  When I was younger, manufacturers used to run intensive ad campaigns whenever they were marketing a product as more effective than before.  I haven’t seen any campaigns that would relate to the claim in question; I’ve only seen the promise of “2X as many loads!” start showing up, in colorful letters, on the product packaging.

We can all tell when we’re being charged more for less.  My water bill keeps going up in spite of the fact that I use less water every year as my landscaping matures – because the rates have gone up.  We can tell when we’re being charged more for the same thing, which is what we call inflation.  But what’s the driving force behind taking so many extra measures in order to charge us the same for less?  Why are businesses handling cost creep that way?  What agenda of business benefits from accustoming us to smaller amounts of packaged items?  I would definitely like to hear from someone who knows the industry on this.  I’m also interested in the theories of readers.

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


Responses

  1. The author of that article doesn’t touch on it; but another area in the CPI is imputed rent, which is the assumed cost to rent a house you own. To the limited extent I checked that out a while back they seem to smooth it quite a bit; but over time if general house prices go up imputed rent as a part of CPI goes up, and if general house prices go down imputed rent goes down – even though to the individual homeowners the actual out of pocket cost of living in the house goes in the other direction. Thus, theoretically, everybody’s water bill can go up while the cost of housing in the CPI is going down.

  2. […] This post was mentioned on Twitter by JT, J.E. Dyer. J.E. Dyer said: Reminder: It’s Not Inflation if It’s Just, Like, Prices Going Up: http://t.co/es6k9IU My latest at TOC on inflation, clever packaging… […]

  3. I can help on the question of how the Consumer Price Index is calculated.

    Inflation is a secular increase in prices generally. When prices generally rise, the CPI will rise. Inflation is *not* an increase in the price of selected items in your market basket.

    When prices for *some* goods rise, consumers buy more of less expensive substitutes. If the price of apples rises, people buy more oranges. Conversely, if the price of apples falls, people buy more apples and fewer oranges.

    The CPI has to take this into account or it will yield biased estimates of the cost of living. That bias can go in either direction, overstating inflation when prices are rising and overstating deflation when prices are falling. This is straight from Econ 101.

    BTW, inflation is governments policy. The Federal Reserve has publicly stated that the rate of inflation is too low. The Administration (and much of Congress) also want higher inflation for two reasons. First, it makes exports less expensive. (Perhaps you heard the President say he wanted to double US exports. This is how he intends to do it. Note that it also makes imports more expensive, hence the rising price of oil.)

    Second, inflation allows the government to pay off existing government debt more cheaply. It will make future debt more expensive, as investors in US Government bonds bid up interest rates.

    And that’s a problem for the next shift of politicians to deal with.

  4. I’ve noticed that the liquid soap containers will have a short tube that doesn’t go to the bottom of the container, thus making some ounces of soap unreachable and ultimately thrown out.

    “Why are businesses handling cost creep that way? What agenda of business benefits from accustoming us to smaller amounts of packaged items?”

    Maybe, for the food industry, they want to ingratiate themselves with Obama (Michelle) in the campaign to make obese America get a little less obese.

    Maybe, for material products, those industries want to ingratiate themselves with Obama (Barack) in the campaign to make us a greener society.

    Since we have gone from a New York economy to a Washington economy over the past couple of years, the corporations want to be sure that they’re in the good graces of Washington, lest they get singled out for “corrective therapy.”

    Anyway, it’s just a possible theory.

    • None of the purposes are political. It’s all about maximizing profit. That can be accomplished only by (a) reducing costs or (b) increasing prices. Making soap bars smaller reduces costs. Making you feel warm and fuzzy because the soap is environmentally superior increases prices.

    • ‘…thus making some ounces of soap unreachable and ultimately thrown out.’

      if you’re too lazy or fail to understand gravity, maybe.

      businesses aren’t doing this to curry favor, RE, it’s all business.

      • I came over here partly to get away from a question about solid pieces of soap, and what do I find but discussion of soap bars. . .

        There is no escape.

  5. You can do a nearly infinite number of loads with modern laundry detergent, since it is pretty much useless. Do you remember when Wisk was effective in removing stains?

  6. Thought you might be interested in the COLA Survey taking place at: http://www.912superseniors.org/

    A weekly survey for grocery items has been going on since November 2010. It was started by the 912 Super Seniors when Glenn Beck requested it on his show one night. I addressed the TP issue the first week! We all have noticed the resizing since the first GASOLINE hikes back in 2008. It is simply getting worse and will continue to do so. You know….”we just have too much stuff” here in the USA. Perhaps the business corporations are more on the socialist side than we thought and are just “helping us” not have too much stufff??

  7. JT:

    Totally off the subject, but your post on Contentions regarding the Canal is one of the first (and few) insightful observations I’ve seen on this whole matter.

    Dare I hope that someone who is in a position to do something will read and comprehend before it is too late?

    • I agree! Your contentions piece will be held brilliantly prescient, if you’re right.

      • Thanks, folks. Determining whether “I’m right” is a thorny issue in itself, as I am NOT predicting a takeover of Egypt by Hamas, Hezbollah, or even the Muslim Brotherhood. In spite of their manifest political maturity in a number of ways, I don’t assess that any of them is centrally organized enough to literally do a revolutionary takeover of Egypt.

        More hangs in the balance right now, however, than Egypt’s future. We’ve seen riots in Egypt before, but we’ve never seen riots in Egypt after Hezbollah took over Lebanon while the US did nothing about it.

        There’s a limit to what any one faction can do. It will take time for strategic concepts to coalesce among the Middle East’s various bad actors. But what’s happening in Egypt is likely to demonstrate that US power is no longer a limiting factor on what’s possible, and that means all bets are off.

        Most of the US punditry is still assessing this as if US dominance is a given, and the traditional assumptions of the last 65 years are all in place. But Obama is doing nothing that previous US presidents — even Jimmy Carter — would have done. It won’t take the anti-status quo factions very long to figure that out.

  8. There is a lot of non-price inflation: Not just smaller packaging, but a switch to cheaper and inferior materials. Take furniture, for example. What used to be veneer over low-cost wood is now veneer over pressboard. And the veneer is plastic. About three times the weight with less than half the strength. To me, that is inflation, even if they held the price the same on the new, inferior product.

    • This is an example input deselection done to reduce costs. Many (perhaps most) consumers appear to prefer low prices. There is plenty of genuine wood furniture on the market, but demand for it is limited and it is much more expensive to manufacture.

      Here’s a thought experiment for those of you who see price inflation hiding in the weeds of everyday life. Let’s agree that there has been substantial inflation over the past 30 years. Now, suppose you were given $1,000 to spend and you could use either the 1971 Sears Roebuck catalog or the Sears website today.

      Which would you choose?

      • The Sears catalog is an interesting way to look at the issue.

        Last evening I noticed that my brother and sister in law had replaced the TV in their sitting room with a 32 inch flat screen model. Cost something like $350, light and sleek, front of it nearly all screen. I wonder if anyone was even making a 32 inch CRT screen in 1971 for consumer sale.

        • That is exactly my point. For many products, quality has increased by leaps and bounds for the same price, or in the case of TVs, a dramatically lower price. The 32″ LCD TV did not exist in 1971, and my suspicion is that a lower-quality 32″ CRT-style TV was outrageously expensive, if one even existed. I’d check if I had a 1971 Sears-Roebuck Catalog, but I don’t. (I am typing this reply on a 1-year old Mac Book Pro that has features which were unavailable at any price in 1971.)

          My wife went to the store today for a few things, including fresh vegetables. In 1971, fresh vegetables were not available in a Virginia grocery store in late January. Yes, fresh vegetables are more expensive in late January than they are in July. Yes, we have become accustomed to having fresh vegetables in late January. We accept the fact that they are more expensive, and we reduce our consumption of other things in order to pay for them.

          So when we consider whether the **cost** of living is rising, we have to control for changes in the **quality** of living.

        • “The Sears catalog is an interesting way to look at the issue. ”

          I know your proclivities and worried about where you were gonna go with that.

          • I’m disappointed in you fuster. You should have been confident I would never go down that low road on J.E.’s site.

            Meanwhile, I just found what may be the all time champion palindrome, and you just made me realize it could have been inspired by the Sears catalog.

            “Dennis, Nell, Edna, Leon, Nedra, Anita, Rolf, Nora, Alice, Carol, Leo, Jane, Reed, Dena, Dale, Basil, Rae, Penny, Lana, Dave, Denny, Lena, Ida, Bernadette, Ben, Ray, Lila, Nina, Jo, Ira, Mara, Sara, Mario, Jan, Ina, Lily, Arne, Bette, Dan, Reba, Diane, Lynn, Ed, Eva, Dana, Lynne, Pearl, Isabel, Ada, Ned, Dee, Rena, Joel, Lora, Cecil, Aaron, Flora, Tina, Arden, Noel, and Ellen sinned.”

            • Now, THAT’s … awesome.

              • Some lonely worked gave that to the world. ‘And there isn’t even a plaque, or a signpost, or a statue of him. . .’

              • sounds like those folks had quite a long night.

  9. Richard Belzer — the point, however, remains that basic products are being modified now not to incorporate new technology or economies of scale, but to accustom the consumer specifically to receiving less for his money. The consumer is not being conditioned to pay more for the same, he is being conditioned to pay the same for less. There’s a difference. There is no other way to spin this, when the phenomenon involves selling the same size box containing less of the product, with the reduced amount of its contents being marked unobtrusively and without advertisement.

    There is no answer to the question of why this is being done in the observation that we get a better TV for our money now than we did in 1971. The “better TV” point is one issue, but it’s not universally illustrative. If we looked at cars, for example, we would agree that in some ways they are a better deal for the money than they were in 1971, but in other ways, they have been made more expensive by the application of thousands of regulations that don’t deliver a better car to the buyer. (We could say that about TVs too, but most people can less readily think of the ways in which regulation affects the consumer price of a TV.)

    We can also say this about many forms of packaged food. Core inflation doesn’t account for the real increase in the price of a box of crackers since 1971, and improvements in technology, as well as still-moderate fuel prices (i.e., transportation costs) tend to drive the price downward rather than upward. But the cost of regulation in every aspect of the lifecycle of a box of crackers causes us to pay absolutely more for it than we did in 1971.

    Americans continue to think about our markets as if only market forces are at work, and it is now misleadingly wrong — importantly, significantly wrong — to do so. I can think of no autopilot market/business force that would make it seem to an industry like the best plan was to — as it were — “hide the decline” in what’s being delivered. The main thing that would drive that, it seems to me, is an estimate about the future availability of the basic materials. In the case of a box of mac & cheese, we’re talking about wheat grain.

    • Your original post said you noticed the “product size deflation” phenomenon in a generic store-brand. But this is an example of private labeling. The retailer contracted with the manufacturer to package in accordance with the retailer’s specific directions. A legal contract cannot be “collusion” or a conspiracy.

      As you know from your own work, anecdotes are not data, and generalizable inferences require representative samples of sufficient size. Maybe your retailer is trying to hoodwink his poorest, least-educated customers. Not an admirable thing, but hardly unique. And there are lots of counterexamples. To choose just one, Costco “forces” consumers to buy everything in packages large enough for a brigade. Even its rotisserie chickens look like they’ve been exposed to all that nucular radiation.😉

      As for measurements of inflation, they do “account for the real increase in the price of a box of crackers since 1971.” That’s easy to do, even if boxes of crackers get smaller, because some people in the sample respond by buying more boxes. They also account for changes over time in the consumer’s market basket; e.g., the substitution of low-fat for regular milk. But they *do not” account for changes in quality, which was the point of my comment.

    • opticon, if you’re already in the habit of buying packaged macaroni and cheese mixes, you’ve long ago been trained to pay more for less.

      • Packaged mac and cheese, like ricearoni, is akin to apple pie, fuster. To insult it is to insult the country itself. Worse than flag burning.

        Next you’ll degrade Cheetos

        • hokey smokes, bullwinkle!

          not only does that packaged stuff contain more sodium than the Dead Sea, but you’re lucky to get any actual cheese in the deal.

          • Cheese is rotted milk and the supposed best of the stuff is the most rotted. Plus, cheese has no table of contents, probably because its manufacturers don’t know.

            Cheetohs will never rot. And every single nutritious ingredient is proudly listed on the package.

  10. Cheetos is good though if you’re set on causing psychosis in lab rats.

  11. Mary Anastasia O’Grady interviews Philly Fed Bank President Charles Plosser in today’s WSJ. Plosser is an “inflation hawk,” and the Journal’s libertarian bona fides cannot be questioned. Here is a snip:

    ” [Plosser] begins by cautioning that ‘with food and commodity prices, as well as oil prices for that matter, the challenge you always face is distinguishing relative price movements from price-level movements.’ For this reason, he tries ‘to get a feel for the underlying trends’.”

    The difference between changes in relative prices and changes in the price level (i.e., genuine inflation) is what I noted in my original comment on this post. The evidence mentioned in the post is consistent with changes in relative prices and other microeconomic phenomena, not with inflation. That’s not to say that inflation should not be a concern. I’m an inflation hawk myself. But for those of us who are more worried about inflation than deflation, we must evaluate the data even more carefully so that we do not let our opinions trump our analysis.

    I encourage readers to see the entire interview. It’s free on the WSJ Opinion page.


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