When even the New York Times acknowledges that inflation has arrived, you know that it’s really arrived.
The story is about how some food manufacturers are disguising the effects of inflation by reducing package sizes rather than increasing prices. It’s worth reading, but probably not a surprise if you do the grocery shopping in your family.
There are two additional points I’d like to make. The first is about this excerpt:
Thomas J. Alexander, a finance professor at Northwood University, said that businesses had little choice these days when faced with increases in the costs of their raw goods. “Companies only have pricing power when wages are also increasing, and we’re not seeing that right now because of the high unemployment,” he said.
What Mr. Alexander is espousing here is akin to the Phillips Curve, which postulated that there was an inverse relationship between unemployment and inflation. That theory crashed on the rocks of reality in the 70s and early 80s when stagflation proved that higher inflation and higher unemployment could coexist quite comfortably.
Actually, if Mr. Alexander had seen the article’s previous paragraph before he made his comments, he might have chosen his words differently:
Where companies cannot change sizes — as in clothing or appliances — they have warned that prices will be going up, as the costs of cotton, energy, grain and other raw materials are rising.
Bottom line: Higher producer prices create one of two choices for manufacturers: smaller containers, or higher consumer prices.
I’m actually seeing quite a resurgence of Phillipian economics, some of it from none other than Fed Chairman Ben Bernanke, who has purposefully pursued inflationary policies in the hopes that a little bit of inflation would create jobs.
Sorry. It doesn’t work that way. And that’s because Bernanke–and millions of others–fundamentally misunderstand what inflation is. That’s my second point from the article.
The Consumer Price Index–i.e., rising prices–is not inflation. The CPI is a measure of the effects of inflation, just as a thermometer is a measure of the effect of temperature on mercury. A higher temperature means mercury expands within a sealed tube, but just as with the thermometer, the CPI lags inflation. Heat–what the thermometer attempts to define–is simply energy. When there’s more of it in a discrete space, what we can measure–the mercury–rises. Inflation–what the CPI attempts to define–is simply the value of money. When there’s more money in a discrete economic space, the CPI rises.
Of course, the CPI lags an increase in the money supply much more than the expansion of mercury lags an increase in the heat energy of the environment. The lag is months or years instead of seconds. And that feeds the illusion that central bankers have the magic ability to check inflation before its effects are disastrous. I have no confidence in the ability of any man to be a better steward than an invisible hand.
Finally, there actually is a third option for manufacturers confronted with higher producer prices. They don’t have to raise prices or reduce quantities. Instead, they can choose to reduce costs. Of course, a principal means of doing so is by reducing payrolls or off-shoring operations. And that is why inflation and unemployment are eager cohabitors.