Saturday Snippet: Notes on Inflation

 

We've heard from investment guru John Mauldin in these pages on several previous occasions.  He's one of the few economic commentators whom I read regularly.  He's able to summarize critical issues into a few paragraphs, and make sense of interlocking factors affecting the economic world we live in.

In his latest weekly newsletter, titled "Notes on Inflation", he makes several very important observations about events and circumstances that may change our economic outlook for a very long time.  I won't steal his thunder by mentioning all of them:  instead, I urge you to click over to his place and read them for yourself.  I'll simply excerpt his notes on current consumer prices and "shrinkflation".

Price inflation is an individualized experience based on your spending patterns. It is increasingly difficult to escape completely, though. Almost every category of living costs is rising to some degree. You can see it in these charts from my friend Liz Ann Sonders of Charles Schwab. (Click the image for a larger view.)

The food component of CPI just posted its biggest annual jump since 1979.

Last week I talked about rent increases driving service prices higher. That’s not the only problem. Services ex-rent are growing even faster.

These other services carry less weight in the CPI formula, so their impact is smaller. As we’ll see, though, they add up, particularly for those with chronic health conditions. Treatment services are expensive and getting more so.

Shrinkflation

Most businesses hate raising prices. At some point they have no other choice, but it’s nerve-wracking because they don’t know how customers will respond. So, they find all manner of ways to camouflage what they’re doing, hoping no one will notice they are paying more.

Anas Alhajji recently posted some examples of “shrinkflation,” when companies keep prices the same but reduce the quantity sold.

• Folgers container: 51 ounces to 43.5
• Nescafe Azera Americano coffee: 100 grams to 90
• Kleenex: 65 tissues to 60
• Walmart Paper Towels: 168 sheets per roll to 120
• Crest 3D White Radiant Mint toothpaste: 4.1 to 3.8 ounces
• Dorito's: 9.75 ounces to 9.25
• Most “Party Size” Chips: 18 to 15.5 ounces
• Chobani Flips yogurts: 5.3 ounces to 4.5
• Burger King chicken nuggets: 10 to 8
• Bounty Triples: 165 sheets to 147
• Tillamook ice cream: 56 ounces to 48
• Hefty's mega pack: 90 bags to 80
• Earth's Best Organic Sunny Day: 8 bars per box to 7
• Vim dish soap (India): 155 grams to 135
• Cottonelle Ultra Clean Care toilet paper: 340 sheets per roll to 312
• Pantene Pro-V Curl Perfection conditioner: 12 ounces to 10.4
• Royal Canin's cans of cat food: 5.9 ounces to 5.1
• Angel Soft: 425 sheets per roll to 320

I can’t verify all those but I’ve seen similar examples. Caffeine Free Diet Coke is now in 10-ounce cans instead of 12-ounce. Some of this shrinkflation amounts to 20%‒25% price increases in terms of the amount you get for your money.

These changes don’t fool CPI, which adjusts for quantities. They fool many customers, though, which could have a long-term cost when people see what happened and lose trust in the brand.

There's much more at the link, including natural gas shortages in New England and the Northeast, European manufacturing moving here to the USA because of energy shortages there, and other important factors.  Highly recommended reading.  For ongoing, interesting perspectives on economics, finance and investing, you might want to consider subscribing to Mr. Mauldin's free weekly "Thoughts from the Frontline" newsletter, from which this morning's snippet has been drawn.  I find it very useful.

I'd like to make two observations on the excerpt above.

1. Note the embedded graphic.  The price of fuel affects literally every other category in the CPI, because everything has to be manufactured and/or moved, and that takes energy.  This affects many consumer choices, and not just short-term, either.  For example, one may decide to buy a house closer to work to reduce commuting expenses and/or use public transport, which in turn affects property prices in many areas.  Many elements of the CPI have not yet fully factored in a much higher fuel price, so their current rate of increase may move higher (perhaps much higher) over time as that filters through to the rest of the economy.  We saw that in Germany just this week, remember?  There's nothing to stop it happening here too.
2. Note the effect of "shrinkflation" on product prices.  As Mr. Mauldin points out, "Some of this shrinkflation amounts to 20%‒25% price increases in terms of the amount you get for your money".  I've had several people complain that my rule of thumb to measure inflation (namely, to multiply the official CPI figure by 3.5 to get the true rate of inflation) is grossly exaggerated.  Unfortunately, it's not.  CPI measurements are supposed to take shrinkflation into account when calculating their numbers, but in many cases that has not filtered through to the analysts doing the figuring.  However, when you add the effect of shrinkflation to the increase in a product's price per quantity (ounces, pounds, gallons, liters, whatever), that 3.5 multiplier suddenly looks far more reasonable, doesn't it?  It's as much a contributor to the effects of inflation on our personal pocket-books and wallets as anything else, yet most people simply ignore it.  That's a dangerous error.

My wife and I continue to experience at least a 30% annualized overall rate of inflation in the things we buy for our household.  Everyone's personal rate of inflation will differ to some extent, because we all buy things that we want and will use, and don't buy those we won't.  Nevertheless, I'll be very surprised if most people aren't currently experiencing a 25%-35% personal rate of inflation.  Go add up your shopping bills, compare them to those of a year ago, and decide for yourselves.

Finally, if you think the current drought is making US agricultural products more expensive and in shorter supply, spare a thought for the folks in China, who look to be having it even worse than we are.  There are two video clips at the link that are pretty eye-opening.  Think of what shortages on that scale, in the two largest economies in the world, are likely to do to international inflation.  It's scary.

Peter