Bad Inflation

Take caution.  It’s April Fools’ Day after all.  What better day is there to keep your guard up and your wits about you?

Remember, there’s a fool on every corner and a sucker born every minute.  Avoid being one of them when at all possible; for it is both demoralizing and expensive.

Sometimes this is easier said than done – particularly when your money’s at stake.  You may have your cash safely tucked away in the bank but that doesn’t means it’s out of reach from the long arm of government mischief.

Here we’ll turn to John Maynard Keynes, a particularly devious fellow, for edification.  From his 1919 work titled, “The Economic Consequences of the Peace”…

“By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.

“There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.  The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

Today, over ninety years later, the hidden forces of economic law Keynes alluded to are at work.  In fact, on this April Fools’ Day, government inflation’s hard at it…making fools of consumers.  For example, where food prices are concerned, some sneaky means are being employed to conceal rising costs…

Stealth Food Inflation

Food stuff has gone up over the last year faster than even prescription drug costs.  The Commodity Agricultural Raw Materials Index is up 39 percent over the last 12-months.  Corn’s up 81 percent, wheat’s up 78 percent, sugar is up 33 percent, and coffee is up 55 percent over that some time.

So, logically, prices for consumer food items should go up next too…or should they?

“With unemployment still high, companies in recent months have tried to camouflage price increases by selling their products in tiny and tinier packages,” reports the New York Times.  “So far, the changes are most visible at the grocery store, where shoppers are paying the same amount, but getting less.

“For Lisa Stauber, stretching her budget to feed her nine children in Houston often requires careful monitoring at the store.  Recently, when she cooked her usual three boxes of pasta for a big family dinner, she was surprised by a smaller yield, and she began to suspect something was up.

‘“Whole wheat pasta had gone from 16 ounces to 13.25 ounces,’ she said.  ‘I bought three boxes and it wasn’t enough — that was a little embarrassing.  I bought the same amount I always buy, I just didn’t realize it, because who reads the sizes all the time?’

“Ms. Stauber, 33, said she began inspecting her other purchases, aisle by aisle.  Many canned vegetables dropped to 13 or 14 ounces from 16; boxes of baby wipes went to 72 from 80; and sugar was stacked in 4-pound, not 5-pound, bags, she said.

“Five or so years ago, Ms. Stauber bought 16-ounce cans of corn.  Then they were 15.5 ounces, then 14.5 ounces, and the size is still dropping.  ‘The first time I’ve ever seen an 11-ounce can of corn at the store was about three weeks ago, and I was just floored,’ she said.  ‘It’s sneaky, because they figure people won’t know.”’

Bad Inflation

The Federal Reserve wants inflation.  For that is their solution to deflation.  Yet they only want a certain kind of inflation.  They want asset price inflation, like rising house and stock market prices.  That’s good inflation.  They don’t want consumer price inflation…especially rising food and energy prices.  That’s bad inflation.

Rising house and stock market prices make owners feel wealthier.  They take the good inflation money from their inflated assets and buy flat screens and granite counter tops.  Fed economists call this the wealth effect.  This type of inflation is good for GDP numbers.

Consumer price inflation, especially rising food and energy prices, is bad for GDP – it hinders the economy.  When filling up the gas tank and the refrigerator costs more and more, this bad inflation diverts money from other goods and services.  Rather than buying a new patio set and propane grill for summer, consumers will make do with what they have.

Alas, for the Federal Reserve, when they juice the money supply, they can’t control where the money flows.  In the late 1990s it went into tech stocks.  Then in the mid-2000s it went into real estate.  The good inflation was so good the populace went bananas in unison.

Since the big bust the Fed’s only gotten half of their inflation scheme right.  They successfully engineered an epic stock market bailout…but house prices are still softer than mashed potatoes.  What’s more, the stock market’s gotten well ahead of the economy just as the inflated money supply has started pumping up oil and food prices in earnest.  If this keeps up much longer the Federal Reserve will have some bad inflation explaining to do.  After that they’ll have to take action.

What happens when Bernanke’s forced to hike rates?

We may soon find out.

Sincerely,

MN Gordon
for Economic Prism

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