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Consumer Price Inflation, and that bag of chips you just bought

March 9, 2011

Recently I came across an interesting video discussing how corporations who provide us things like processed food have been scamming the American people through typical bait and switch economics. By packing less and less goods into the same packaging they can make you pay more for less.

Vodpod videos no longer available.

Mark Ames on Inflation and Consumer Prices, posted with vodpod

(Note: I’ve been having trouble getting the video to play on my computer. If you’re having similar problems just click on the link above and it will play)

Mark Ames suggests that as commodity prices have been soaring corporations have been ripping you off on every bag of potato chips you buy.

His examples include:

  1. Selling 2/3rds a pound of coffee rather than a pound raising the price 33%(assuming no other price increases)
  2. 11 ounce hotdogs instead of 12 ounce hotdogs raising the price 8%
  3. 2.6 ounces of tuna rather than 3 ounces of tuna raising the price 13%

Analysis

As someone who exercises and is conscious about eating I’ve noticed that what Mr. Ames said is true… the protein content on my can of tuna fish has mysteriously gone down over time. Interestingly enough, as an economist, I never put two and two together and connected this with inflation… I just wondered where all the tuna went.

So to test Mr. Ames’s hypothesis I set about to conduct my own experiment. I bought a bag of potato chips, and here are the dismal results.

There certainly is a lot of packaging and not a lot of chips. Now while I’m skeptical about the possibility for hyperinflation, I have noted the possible inflationary effect of QE2 on commodity prices. I think these changes predate that spending however. Instead, if I had to time when I first noticed the change in my tuna it would’ve been around the time of 2008 during the last sharp rise in oil prices.

What I noticed during this time was that tons of other prices also went up, everything from consumer products to restaurant prices. In fact at a local eatery I frequent they explained to me they had to raise prices because their suppliers had raised prices. So what this current process indicates to me is that the lessons of Neo-Keynesians holds true. Prices are sticky, meaning that they adjust slowly and so after being pressured to rise they may not fall when economic conditions return to normal.

As of right now, I’m still not sold on hyper-inflation or even long-term global inflation… the market is just too unstable. Note, however that uncertainty in economic models tends to raise costs. Further quantitative easing 2 likely contributes to rising commodity prices as investment bankers chase profit with easy money. Additionally, pressures from rising consumption in the developing world also contribute to rising prices in commodities (at least in the short-term before supply can adjust). However, even with all these factors I just don’t know if in the long-term there is enough momentum in the economy to justify inflation concerns at the moment. Looking at economies globally there is still a lot of sovereign debt, consumer debt, inequality, uncertainty, economic slack, and deflationary pressure.

The case here seems to be that sticky prices are prevalent, and when companies have an excuse to raise prices, they won’t give that up when economic factors change and will instead use it as an excuse to take profits.

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