I Told You So
Not a big fan of “I told you so”. Seems like those Monday morning Quarterbacks who tell you they were right but you can’t even recall when and what they actually said.
With me, it’s easy. My columns are all on my Substack homepage and you can go back and double check. If I am wrong, you can double check that as well. You may have to dig a little deeper to find it, but it’s there.
Today my “I told you so” moment is about how inflation may end up dying from it’s own weight. Simply put, when prices rise too much, people buy less of them because they don’t have the equivalent funds to buy the same amount as they previously had done. For example, you might like to buy quart containers of blue berries, you pick on them every day and when they get rotten, you throw them out. Now, blueberry prices are up 30% from the beginning of the year and you will buy maybe a pint or you may not buy one at all. So, the pressure on blueberry prices subsides a little because the demand has subsided somewhat. I know, bad example but hopefully you get the idea. As prices rise faster than inflation or faster than wages, demand goes down. Demand is one driver of inflation. Supply is the other.
We have seen prices come down in a lot of areas. Lumber for instance. The housing boom is no longer working and lumber mills have an oversupply of lumber. Lumber that was milled to meet this never ending demand of new home construction and renovations. Now, since demand has dried up, mills and lumber companies are lowering prices to pre inflationary levels.
Misjudging demand and supply levels is endemic to industries in this country. There are people that use sophisticated modeling techniques to help manufacturers, retailers, transportation companies gauge supply and demand and they were pretty much all wrong. What that creates is a tilting of the supply/demand axis where pricing is no longer in the hands of the provider, it goes back into the hands of customer and that is how the inflation situation will be resolved. Consumers will buy what they can afford and manufacturers will price things to be affordable.
When supply outstrips demand you have deflation. Prices come back to earth and the Fed, while still believing that their actions will mitigate this inflation spiral, continue to raise interest rates into the end of the year, could put the economy into a recession. They know this and again, they will miss the mark.
To give you a better example of how natural economic forces will bring inflation to heel just look at the oil market. Oil is usually the purest example of the supply/demand model. Demand has come down as people are being more conservative, driving a little less and conserving. You are less apt to make three trips to the grocery store in a week if you are paying over five dollars a gallon for gas. You will do it in one trip. Maybe you won’t drive over to your friends house who lives three blocks away, you will just walk. The mindset is to not waste money. That cures demand when it is for an extended period of time.
Now, you see prices coming down fairly quickly. If one more MSNBC pundit tells me that the reason gas is coming down is because of White House policies, I am going to puke. This has nothing to do with President Biden, the White House or Congress. They helped bring it on but they did nothing to solve it. This is the natural reduction in demand based on price and availability, that is it.
The reduction in gas and diesel prices will help transportation companies and independent owner operators for sure and that will also help reduce some of the pricing pressures.
So, my thesis is correct, inflation will die sooner from it’s own weight than with any help from the Federal Reserve.
Now it is time for a gripe that you knew was coming. Almost a year and half ago I mentioned the next level of inflation, the quiet inflation, was the reduced size of packaging. It may have started with yogurts 18 years ago when Dannon started giving you smaller cups of yogurt. Going from an 8 ounce container to a 6 1/2 ounce one. Barely noticeable, because if I recall correctly, the packages were the same but the the contents were reduced. Then they started making smaller containers to save on packaging costs as well. Yet the prices were relatively stable. There is no inflation in 2016 but in reality there has always been inflation and the consumers have been continually duped but thats life and we have no choice but to accept it.
Until now
I have gotten used to the packaging scams. Its the producers way of getting even because for the last 10 years (prior to Covid) producers have had a hard time raising prices significantly. So they shrink the package and charge the same.
Well, as I have said, I accepted it, until now. I went to the supermarket to get a pint of Haagen Dazs vanilla ice cream. Hmmm, $5.99. That is expensive but I needed it for my home made peach cobbler and I bought it. Sucked it up and plunked down 6 bucks for something that was 4.39 six months ago. That didn’t bother me as much as when I got it home and realized that it was only 14 ounces!! Seriously? You raise the prices 36% and then cut the contents back by 12 1/2 %. I was livid! Sure, I dolloped it on my freshly baked peach cobbler, watching it melt into a gooey sweet mess but I promise you this, I will never buy it again.
Unless of course, it’s on sale and I have a coupon.