In yesterday's The Idiot's Guide To Blowing Bubbles, I sarcastically fired a warning shot about rising commodity prices stemming from the Fed's QE2 initiative. Pick almost any commodity: the price is rising. The problem is that nobody representing the Powers That Be seems to give a damn, or they dismiss the problem out of hand. Yet rising food and energy costs (included in the "non-core" Consumer Price Index, or CPI) are on track to ravage the balance sheets of most American households.
Sarah Palin recently gave a speech criticizing money printing and warning of the dangers of inflation. There was nothing out of the ordinary in her remarks, but when she tried to point out that food and energy costs are rising, Sudeep Reddy at the Wall Street Journal and others were quick to discount her views because official government statistics say otherwise!
Unlike most U.S. economists and politicians, however, Palin tries to draw the concerns about quantitative easing to inflation today and falls short. She says, “everyone who ever goes out shopping for groceries knows that prices have risen significantly over the past year or so. Pump priming would push them even higher.”
Grocery prices haven’t risen all that significantly, in fact. The consumer price index’s measure of food and beverages for the first nine months of this year showed average annual inflation of less than 0.6%, the slowest pace on record (since the Labor Department started keeping this measure in 1968). Even if you pick a single snapshot — say, September’s year-over-year increase in prices — that was just 1.4%, far better than the 6% annual increase for food prices recorded in September 2008.
The overall consumer price index was up 1.1% in September from a year earlier. Apart from September 2009 (when prices were down 1.3%), that was the slowest annual inflation rate for September since the early 1960s. That’s not strong evidence to argue about rising prices today.
I don't usually talk about the CPI because of all the phony data the government hands us, the inflation data is the worst. If you understood the hedonic adjustment, and other deft substitutions the government makes to keep official prices stable—if the price of steak goes up, households are presumed to switch to hamburger—you would agree with me. Screw them. You are free to believe what your eyes and wallet tell you when you go food shopping and fill up at the gas pump.
The Palin roast continued at Tech Ticker's What Sarah Palin Gets Wrong About Inflation—
Palin then responded to Reddy on Facebook — saying he must be wrong because another article in The Wall Street Journal from last week bore the headline: Food Sellers Grit Teeth, Raise Prices: Packagers and Supermarkets Pressured to Pass Along Rising Costs, Even as Consumers Pinch Pennies. The article noted that "an inflationary tide is beginning to ripple through America's supermarkets and restaurants ... . Prices of staples including milk, beef, coffee, cocoa and sugar have risen sharply in recent months."
A few points worth noting on why Palin is wrong. First, she falls into a common debater's trap of misdirection. She pointed to an article talking about something that might happen in the future as evidence to something she said had already happened.
The "prices of staples" have risen sharply in recent months, but Palin is talking about something that might happen in the future? Give me a break!
Kraft Foods Inc., Sara Lee Corp. and General Mills Inc. already have said they'll raise prices on certain items. Starbucks Corp. backtracked on an August announcement that it would hold coffee prices steady, saying in September it would boost prices of larger and hard-to-make drinks. This week, cereal maker Kellogg hinted that it will be raising prices, without disclosing specifics.
Grocery chains Safeway Inc. and Kroger have said they'll pass supplier increases along to consumers.
Food prices are rising faster than overall inflation. The consumer price index for all items minus food and energy rose 0.8% over the year to September, the lowest 12-month increase since March 1961, the Bureau of Labor Statistics said. The food index rose 1.4%, however. The U.S. Agricultural Department is predicting overall food inflation of about 2% to 3% next year.
And as if this wasn't bad enough in the current economic environment, there are the product downsizing strategies by which food companies give you less bang for the buck. I mentioned this yesterday in The Idiot's Guide with regard to our ever-shrinking toilet paper. At least Canadians are honest enough to report this kind of stuff. Here's the Montreal Gazette's Companies making products smaller but not their prices—
It could be a thinner box with less room for cereal, a skinnier jar with one less serving of pasta sauce, or a flatter container that holds fewer scoops of ice cream.
As companies try to keep costs in check without catching the attention of price-conscious consumers, the recent economic downturn wasn’t just about job numbers and government deficits — it’s also been about downsizing products without downsizing their prices.
“Certainly with the recession over the past few years, there seems to have been a lot. It’s a sneaky way to pass on a price increase to consumers because the product package is either identical to what it was before or virtually identical, so the consumer thinks they’re buying the same old product, but they’re not,” said consumer watchdog Edgar Dworsky, who specializes in consumer protection and is current editor of the website mouseprint.org, which exposes the strings and catches in advertising fine print.
“You’re getting less and just by definition, if you’re paying the same price and you’re getting less, that’s a bit of a ripoff.”
Normally, companies don’t advertise the change when they roll out new peanut butter jars, chip bags or other product packaging to fit less food. Some industry giants, including Unilever, General Mills, Nestle Canada and Loblaw, declined to provide Postmedia News with a list of products that have undergone recent size adjustments.
The Montreal Gazette article provides lots of specific examples, so read it if you want the details. In the American press, product downsizing is like some dirty little secret nobody wants to talk about.
And what about gasoline? According to AAA Fuel Gauge, the average national price is $2.863 per gallon. A month ago it was $2.811. The oil price (at this writing) is $87.74/barrel, which is about 6 bucks higher than it was a few weeks ago. Is Sarah Palin wrong?
The surging commodity costs, the higher food prices, the product downsizing. Are we just making this stuff up because it's not (yet) reflected in the CPI? You know what they'll do at the BLS? If the cost of bread goes up, they'll assume you've switched to low salt soda crackers, which are cheaper. I'm just kidding—I hope—but this made-up example tells you how much I trust CPI numbers.
And here's the final insult as described in Yahoo Finance's Core CPI remains unchanged—
Thus, if one strips out the volatile food and energy prices to get to core inflation, prices were unchanged in August, down from a 0.1% increase in July and up 0.2% in June. Year over year, core prices are up 0.9%.
While everyone consumes food and energy, their prices tend to be extremely volatile, and can be influenced by external events. As such the Fed tends to focus more on core prices when setting monetary policy.
After all, it would not be a good idea to be tightening up on the money supply or raising interest rates simply because there is a drought in a key agricultural area of the world which drives up food prices, or because there is instability in the Middle East which causes energy prices to rise. Together, food and energy make up just 22.3% of the total CPI. The graph below tracks the long-term history of the CPI (year over year change) on both a headline and a core basis.
That's right—the Fed discounts "extremely volatile" food and energy prices when printing money setting monetary policy. There it is! The Fed doesn't give a damn about that non-core part of CPI, which just happens to be the 22.3% nobody can live without (aside from shelter). And that's the problem which Sarah Palin had the temerity to point out.
Commodity prices have already been under pressure for months now due to rising demand in emerging markets like China, India and Brazil. Now we've got this futile destructive boost to those prices stemming from QE2. And what is the "official" reaction among mainstream economists and government officials? Who cares? they say. Or just look at the CPI they say.
And why should we be surprised by that?
Do you know what the worst part is for me? I live in such a screwed-up world that I've got to rise to the defense of Sarah Palin. Of all people! The next thing you know I'll be watching Glenn Beck (who thinks George Soros runs the world economy) and advocating tax cuts for the rich. Well, OK—that's never going to happen. But I hope you can see my dilemma. If I come down on the right side of an issue, as I've done today, I'm going to be siding with some crazies somewhere, regardless of whether these wackos work for Fox News, the Wall Street Journal or the Federal Reserve.
That's just the way it is in a decaying Empire.
It just goes to show that just because someone is deemed a "wacko" doesn't mean they are wrong about everything. Even the liberal chew toys get some things right, but the duopoly and confirmation bias allows people to get emotionally riled up at the 'other side'--meanwhile neo-feudalism grows strong and the oligarch's rake in wealth and the peasants fight amongst themselves. It's amazing to me how many Republicans get so angry at welfare folks, meanwhile the multinationals and the government help make outsourcing labor globally easier and easier. The Dem's watch one youtube video of G. Beck acting like an idiot and just assume that all he says has no merit.
Sadly, people spend most of the time confirming their prejudices, biases, and opinions, very very few people actually challege their own belief systems. Cognitive dissonance is our friend not the enemy, being uncomfortable, or more mentally flexible is a stength not a weakness. The powers that be must be laughing all the way to the bank, as the peasants fight wars for them, and spend all their time fighting amongst themselves over who earned the scraps vs. who just is given the scraps by the gov't.
My father becomes blatantly irrational anytime Sarah Palin's name is even mentioned, getting riled up over another talking head-cult of personality figure is just a waste of energy. Carpe Diem' and enjoy the down curve of modernity, certainly isn't boring.
Posted by: Mitch | 11/11/2010 at 10:44 AM