As we celebrate April Fools’ Day, it’s a reminder to stay vigilant and think critically. Today is the perfect occasion to sharpen our awareness and avoid getting tricked.
Beware of the countless pitfalls that can lead to being duped — whether by others or through economic missteps. It’s all too easy to become a victim when financial interests are at play, and nobody wants to find themselves regretting a poor choice.
Often, the threat to our finances comes from unexpected places. Even if your savings are secure in the bank, they are not immune to governmental maneuvers that can affect their real value.
To illustrate this point, we can reference economist John Maynard Keynes from his 1919 publication, “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, more than ninety years later, we can see those hidden economic forces in action. On this April Fools’ Day, inflation remains a significant issue, often leading consumers to unwittingly pay more. For instance, some clever tactics are being used to disguise the true cost of food.
Stealth Food Inflation
Food prices have surged in the past year, outpacing even prescription medications. According to the Commodity Agricultural Raw Materials Index, prices have risen by 39 percent over the last twelve months. Corn has jumped by 81 percent, wheat by 78 percent, sugar by 33 percent, and coffee by 55 percent.
With these substantial increases in raw materials, one would expect consumer food prices to follow suit. But are they?
“With unemployment still high, companies have recently attempted to mask price increases by offering smaller package sizes,” reports the New York Times. “This trend is becoming most noticeable at grocery stores, where shoppers pay the same amount but receive less product.”
For Lisa Stauber, a mother of nine in Houston, managing her grocery budget demands keen observation. Recently, she found that her usual three boxes of pasta yielded less than expected, prompting her to investigate further.
“Whole wheat pasta had gone from 16 ounces to 13.25 ounces,” she noted. “I bought three boxes, thinking it would be enough, but it wasn’t — that was quite embarrassing. I bought my usual amount, but I just didn’t realize the change, because who checks the sizes constantly?”
Ms. Stauber, 33, began scrutinizing her other grocery items. She noticed that many canned vegetables had reduced from 16 ounces to 13 or 14, baby wipe packages had shrunk from 80 to 72, and even sugar was now sold in 4-pound bags instead of 5-pound ones.
“About five years ago, I used to buy 16-ounce cans of corn. Then they went to 15.5 ounces, then 14.5 ounces, and the size keeps dropping. I was shocked to see an 11-ounce can of corn in the store just a few weeks ago,” she remarked. “It’s sneaky, as they assume consumers won’t notice.”
Bad Inflation
The Federal Reserve actually seeks inflation. For them, it’s a remedy for deflation, but they prefer a specific type—asset price inflation, such as rising home and stock market values, which they deem favorable. In contrast, consumer price inflation, particularly when it involves food and energy, is viewed as detrimental.
When home and stock prices rise, owners feel wealthier and spend their increased wealth on luxuries like flat-screen TVs and granite countertops, a phenomenon known as the wealth effect. This type of inflation positively impacts GDP figures.
On the other hand, consumer price inflation can stifle economic activity. As the cost of essentials like fuel and groceries increases, consumers find themselves diverting funds from discretionary purchases. Instead of splurging on a new patio set for summer, they may settle for what they already have.
Unfortunately for the Federal Reserve, even as they attempt to expand the money supply, they cannot dictate where the money flows. In the late 1990s, it fueled a tech stock boom; in the mid-2000s, it turned into a housing market bubble. The resulting positive inflation led to unsustainable consumer behavior.
Following the economic downturn, the Fed has only partially realized its inflation strategy. They managed a significant stock market recovery, but housing prices remain sluggish. Moreover, the stock market has outpaced economic growth, while rising oil and food costs become more pronounced. If this trend continues, the Federal Reserve will face significant challenges to explain the implications of rising inflation and will need to respond accordingly.
What will happen if Bernanke is forced to increase interest rates?
Only time will tell.
Sincerely,
MN Gordon
for Economic Prism