Could The Hot 2021 Inflation Rate Be The Next Big Lie?
Inflation Abstract getty  Katy, the inflation rate is probably transitory  so please dont bar the door (just yet)! The Labor Departments Consumer Price Index (CPI) rose 4.2% in April, and today it was announced that for the month of May it rose 5% (YoY). History records that it was the biggest jump since August of 2008, and the biggest jump in core inflation since June of 1992. Inflation has arrived, and everyone knows it, but all is calm for now  until someone taps the brakes. To be expected say the pundits, followed with: short term adjustments to supply chain issues.  Most Americans find it difficult to grasp our economy  especially when it comes to retail prices and inflation. Its clear we are emerging from a pandemic-induced recession, but costs are rising so fast that many (except for Government officials) worry that prices wont come down any time soon. The authorities keep saying that inflation will be short-lived or transitory while retailers and consumers believe it is a longer-term problem. Federal authorities want to tone all this rhetoric down, to push the Democrats spending agenda (including infrastructure). Others say the barbeque temperature is already too high, and the steak is about to sear. Some pundits have chosen to quote Harry Truman - to remind everyone that economists often tend to vacillate about economics by saying  one hand or the other (Truman wanted a one-handed economist). However, it might be better to quote Warren Buffet who said: I dont read economic forecasts. I dont read the funny papers. He also said: Any company who has an economist, certainly has one employee too many.  Truthfully, as someone with an economic background, the better way to understand inflation is to evaluate your surroundings and ask yourself if prices are rising and what does that mean. In the fashion industries, the cost is up - cotton is up 34%, cost of labor has increased and freight costs have skyrocketed. In the retail world, the price of everything just seems to be rising at the same time. A high-quality tee shirt that was $26 last year is now about $31. Lunch in town was $25 and now is $30. Gasoline that was $2.26 a gallon last year is now $3.06 (up 35%). TV viewers capture the sub-rosa drift of all this when they view the Liberty Mutual Insurance ads based on having some control over price. The yellow Emu bird in their commercial (named LiMu Emu) - delivers a timely retail message based on value. But when Doug says: Only pay for what you need the commercial hits a marketing home run. Seriously, how true is that line in a time of rising prices - consumers should only pay for what they need. However, in the fashion world, the equation shifts to an entirely different purchasing model - based on aspiration. Buying the generic brand is fine, but people who prefer the real brand are always willing to pay more to capture the cache. Fashion brands play this marketing game to the hilt. A pair of comfortable sneakers is cool at $50 - but buying Nike Air Max 97s at $170 is aspirational. As the Naked Juice company says: Strip away what you dont want (like sugars and preservatives) and buy what you do want. The concern for the moment is that inflation is real, but the topic is being heavily politicized. The Republicans say that free-spending Democrats are overheating the economy. They suddenly remembered Jimmy Carter as gas lines started forming in Atlanta after the Colonial Pipeline fiasco. The Democrats, for their part, are in a rush to spend as much as they can while they can. On the other hand, and this is troublesome, they tend to and brush all inflation criticism aside. Then, like the lone prophet standing in the desert, along comes Larry Summers (a prominent Democrat with excellent financial credentials) and he takes a 180 degree turn to wake up the administration. Mr. Summers is concerned about the current tone emanating from people of power: The sense of serenity and complacency being projected by economic policy makers (that this is all something that can be easily managed) - is misplaced.  Mr. Summers was a former Treasury Secretary, former Head of the National Economic Council, and a former President of Harvard. When he says we should be concerned about inflation and economic overheating, it rings a serious bell. Retailers reacting to this environment of rising costs have two basic methods to deal with the inflation:  *They can raise the price and hope they dont sell less units or  *They can bundle the goods (or shrink the quantity) - to mask the price increases - in a method referred to as shrinkflation.  The bigger problem in this quagmire is that it hits the big box retailers harder, because they have space to fill during inflationary times - and it costs much more to fill the exact same space - which raises their cost of inventory. When that happens, they often load up on things like plastic storage containers or paper towels  items that fill space and dont cost a lot  so that the store looks full, and they can lower their inventory cost to keep pace with sales. Raising the price during inflation potentially comes with a more dire consequence after it exceeds a tipping point, simply because consumers are only willing to pay so much - and they will either buy the item, buy less of the item, find a cheaper version of the same thing, or not buy it at all. Bundling or shrinking the retail item is a more persuasive way to avoid customer sticker shock. When a $30 sweater goes to $40 the retailer might promote them at $45 each or two for $80  so the consumer thinks they are actually saving $10 - but they are actually paying more for the same thing. Another retailer might have a 10.5 oz cashmere sweater selling for $100 and just converts it to a 9 oz cashmere selling for $90. A third retailer might take all the cashmere and convert it to fine merino wool, to sell at the same price (but at a lower cost). These are classic examples of bundling in the era of shrinkflation, or going to the driving range to find that the medium size bucket used to have 80 golf balls, now has 70 at the same price. The consumer might not notice the difference, and that is the game that retailers are forced to play in order to remain competitive. Economists look at two indexes to gauge inflation. When the Labor Departments CPI rose 4.2% in April, there was concern. Now, with a CPI of 5% in May there should be more concern  but the expectations have been tempered in the media with the shout out - that this 5% number is to be expected or transitory. An economics professor would once said that the numbers are the numbers, and we should not argue with the data. The Department of Commerce will soon issue the Personal Consumption Expenditure Index (PCE) which rose 3.6% in April and this index (due out on 6/25) is more closely followed by the Fed. Both increases in inflation data are not trending in the right direction, but the administration continues to encourage everyone - to give it more time. Some economic predictions in the real world are not based on indexes, but might be based on the candy called Chuckles which come in a brightly colored sleeve and are fixed item that many people simply cannot live without. The sugar-coated jelly candy has five flavors in a line: cherry, lemon, licorice, lime, and orange. In inflationary times, the price just goes up, and it rarely goes down. No matter what happens anywhere in the world, the licorice flavor always remains in the center of the sleeve. Chuckles used to be $.75 on the street corner in NYC, then they went to $1.00, and today they are $1.25. He answered in his gruff NYC tone of voice: Inflation, get used to it