• Tag Archives inflation

  • ‘Shrinkflation’: The Latest Consequence of Reckless Federal Spending, Explained

    Posted on by Azrael Comment

    We already know that top inflation metrics have recently surged, and executives at companies like Costco are warning that price hikes are hurting their customers. Now, there’s a new inflation consequence hitting consumers: “Shrinkflation.”

    I’d never heard the term before today, but new reporting from the Washington Post explains how some companies are dealing with inflation in their supply costs by shrinking the sizes of their products, to avoid the customer backlash that comes with raising sticker prices.

    “Consumers are paying more for a growing range of household staples in ways that don’t show up on receipts — thinner rolls, lighter bags, smaller cans — as companies look to offset rising labor and materials costs without scaring off customers,” the Post reports. “It’s a form of retail camouflage known as ‘shrinkflation,’ and economists and consumer advocates who track packaging expect it to become more pronounced as inflation ratchets up, taking hold of such everyday items such as paper towels, potato chips and diapers.”

    “Consumers check the price every time they buy, but they don’t check the net weight,” consumer advocate Edgar Dworsky told the newspaper. “When the price of raw materials, like coffee beans or paper pulp goes up, manufacturers are faced with a choice: Do we raise the price knowing consumers will see it and grumble about it? Or do we give them a little bit less and accomplish the same thing? Often it’s easier to do the latter.”

    This is just a crafty way companies are adapting to a surge in their expenses that isn’t their fault. But it’s more than a novel business trend worth noting—it’s yet more evidence that when policymakers make decisions that ultimately cause inflation, it hurts everyday citizens in their wallets in thousands of small ways. Each instance of paying 2 percent more for something or getting 5 percent less may pass without notice, but overall, you’re quietly getting poorer.

    “Shrinkflation” just puts a name to this ongoing reality.

    It’s important to remember that the current increases in inflation are directly attributable to policy changes the federal government has made. Rather than pay for their multi-trillion-dollar “stimulus” spending in full with taxes, politicians have opted to have the government simply print more money to pay for it all. This ultimately leads to indirect taxation of us all through inflation.

    “Nearly one-quarter of the money in circulation has been created since January 2020,” FEE economist Peter Jacobsen explains. But printing more money doesn’t mean we actually have more stuff, and “if more dollars chase the exact same goods, prices will rise.”

    Or, alternatively, packages will shrink. Either way, consumers like me and you lose thanks to Washington’s profligacy.

    Like this story? Click here to sign up for the FEE Daily and get free-market news and analysis like this from Policy Correspondent Brad Polumbo in your inbox every weekday. 


    Brad Polumbo

    Brad Polumbo (@Brad_Polumbo) is a libertarian-conservative journalist and Policy Correspondent at the Foundation for Economic Education.

    This article was originally published on FEE.org. Read the original article.


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  • Because of Inflation, We’re Financing the Financiers

    Posted on by Azrael Comment

    It may come as a surprise to you that the United States has been financing a welfare program that takes money from the poor and gives it to the rich.

    If you read a lot of modern macroeconomic literature or major in economics in college, you’ll hear economists talk of the “multiplier effect” of monetary and fiscal stimulus. In times of economic slump, money injection (for monetary policy) or government spending (fiscal policy) greases the wheels of our complex economic machine, bringing unemployment down and output up.

    In response to these policy proposals to change the level of unemployment or production, “real” metrics of the economy, Milton Friedman argued that money is “neutral.” In other words, changing the supply of money in the economy to manipulate relative price levels doesn’t actually change anything in the long run. When people realize their money is worth less than before, they adjust their mindset, demanding higher wages for higher prices. After these changes are made, unemployment and production end up in the same place as before.

    While Friedman’s argument sheds light on many failed economic policies from the latter half of the 20th century, it doesn’t explain the mechanics behind rising price levels (from inflationary policy) once the newly created money travels through the economy, sector by sector.

    Richard Cantillon first suggested in 1755 that money is not as neutral as we think. He argued that money injection—what we could consider inflationary policies—may not change an economy’s output over the long-term. However, the process of readjustment affects different sectors of the economy differently. This analysis, known as the Cantillon Effect, serves as the foundation for the non-neutrality of money theories.

    Cantillon’s original thesis outlines how rising prices affect different sectors at different times and suggests that time difference effectively acts as a taxing mechanism. In other words, the first sectors to receive the newly created money enjoy higher profits as their pay increases, but general costs are still low. On the other hand, the last sectors in which prices rise (where there is more economic friction) face higher costs while still producing at lower prices. Because, as Friedman taught us, the real economic variables are still the same in the long run, the price of inflation is paid for by a “tax” on the sectors with more friction, which subsidizes more time-responsive sectors. In our modern economy, the Cantillon Effect is at play with a stratified socioeconomic impact, favoring investors over wage-earners.

    Let’s say the Fed decides to lower interest rates (by expanding the supply of money in the economy). Soon after the Fed makes its announcement, investors anticipate new earnings from increased investment. In fact, once even a few people get wind of the Fed’s intentions, investors expect prices to rise, whether they rely on algorithms or rumors for their information. Investors flock to the financial markets, hoping to get there first; if they can buy stocks while the prices are still low, they can reap enormous profits once prices rise.

    However, the sudden increased demand for stocks in the financial market bids up asset prices, and this happens rapidly. Within minutes—seconds, even—the expected increase in the price level has been factored into the financial markets. The first place where “inflation” is felt is in the financial marketplace.

    This means that people who are most invested in the market are the first to benefit from inflation. They see their asset prices increasing, yet the prices in the rest of the economy are still low because this happens seconds after it’s clear the Fed is inflating the money supply.

    While the companies with investors buying up shares see the increased inflow of cash, they also have new investment opportunities because of lower interest rates from inflation. Both of these factors help their profits rise, and they find ways to continue expanding business (by increasing their purchases of intermediate goods). The first few businesses to turn their profits into production benefit from lower prices, but once other companies start demanding more intermediate goods, their prices start to rise. Thus, the intermediate goods sector, which includes raw materials and technology that facilitates business, is the next to experience rising price levels. Companies that primarily sell these intermediate goods now have more profit, but the rest of the prices in the economy are still relatively low.

    Afterward, these higher-priced intermediate goods increase the costs of business operations and production, so final goods (for consumers) begin to rise in price, as well. The companies that can turn around their initial investments to final goods the quickest have the most to gain.

    But there’s more. When prices are higher throughout the economy, the last to benefit are workers, who see an increased cost of living and factor this cost into their wage demands. Even among workers, wage-earners are the worst off, for many salaried employees anticipate inflation and factor it into their contracts. And with that, the inflationary policy has passed through the economic system, raising prices. And, as Friedman said, the policy—in the long run—doesn’t change real factors.

    In the modern financial system, the current realization of the Cantillon Effect looks quite similar to a regressive tax. The first to benefit are often corporations with plenty of investors, whether publicly traded or financed through private equity. Next, raw goods benefit from increased prices, including already heavily subsidized industries such as steel and aluminum. Technology also benefits, for it is utilized as an intermediate good for many companies. Even within the raw goods and technology sectors, the quickest corporations to turn investments into production—larger corporations like Amazon or Microsoft, which have the infrastructure to expand—benefit disproportionately.

    On the consumer side, people investing most of their savings in the stock market benefit from increased investment bidding up prices. On the other hand, individuals living from paycheck to paycheck, or even those who just have a savings account in a bank, lose money to price increases.

    Nonetheless, policymakers neglect these effects in an effort to reign in the economy without considering the consequences of their actions. Often, they justify surprise inflation by claiming it will “help the poor.” However, any inflationary monetary policy regime suffers from the ramifications of the Cantillon Effect.

    In fact, even a price-stable economy requires money injection to counter the deflationary effects of growth. This money injection may keep prices for real goods stable, but asset prices continue to rise. It’s true that most economists accept a low level of inflation as fine—healthy, even. But when our current expansionary system, however well-intentioned, ends up exacerbating inequalities in the marketplace under the pretense of egalitarian stability, we ought to examine its true consequences more thoroughly.

    Source: Because of Inflation, We’re Financing the Financiers – Foundation for Economic Education


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  • The Sectors Driving America’s Cost of Living Spike All Have One Thing in Common: They’re Heavily Regulated by Government

    Posted on by Azrael Comment

    In a recent extract of her book Squeezed, Guardian columnist Alissa Quart documented in detail the insecurities faced by many ordinary American families. Student loan debt, housing costs, and health care bills can be crippling even for those on decent enough incomes. For the struggling poor with job insecurities, the situation can be worse still.

    Even with the US labor market tightening, concern about working- and middle-class living standards has left politicians reaching for radical solutions. In the past year, mainstream politicians have advocated federal job guarantees, universal basic income, huge minimum wage hikes, attempts to boost union power and membership, expanding tax credits, co-determination laws, universal single-payer health care, and much else besides.

    A better first step is surely to ask why certain things are expensive in the first place.

    Putting aside the legion risks of such policies, these proposals have one major thing in common: they could be described as “income-based approaches” to trying to raise living standards. They all assume that markets, left to their own devices, cannot provide adequate living standards, necessitating interventions to raise households’ disposable incomes (through affecting income via pay or transfers directly, or reducing household payments for certain goods or services).

    For sure, some policies in this mold can help to alleviate financial hardship. But Quart highlighting out-of-control costs of different goods or services surely suggests a better first step is surely to ask why certain things are expensive in the first place, before reaching for compensatory interventions or transfers.

    In a recent research paper for the Cato Institute, I did precisely that for basic goods and services which poor households spend disproportionately on. And I found that nine types of intervention alone in housing, food, child-care, transport, clothing, and sectors governed by occupational licensing combine to raise the cost of typical poor households directly by anywhere between $830 and $3,500 per year. All these “income-based approach” things we do, in other words, are compensating households for cost-inflating government policies elsewhere.

    The average household in the bottom income quintile puts 25.2 percent of total spending per year towards direct housing costs, for example. Yet land use planning and zoning laws imposed at local levels of government, particularly in desirable metropolitan areas, impose a significant regulatory tax. This costs households anywhere up to around $2,000 per year, depending on location. This not only has direct financial consequences but makes it more difficult for poor households to move to good job opportunities.

    The best evidence suggests too that state-level child-care regulation, including staff-child ratios and qualification requirements for center staff, raises prices by $500 per year or more across the country, not to mention making it more difficult for low-income parents to return to work.

    In fact, in area after area, one sees misguided interventions raise the costs of everyday items. Ethanol mandates and protectionist sugar and milk programs raise the cost of everyday groceries. Regulations relating to fuel efficiency and car dealerships raise the cost of cars and hence driving. Tariffs on clothing and footwear are extraordinarily regressive because the poor spend disproportionately on these goods, and lower-quality variants of products tend to attract the highest tariffs. It’s well established too that occupational licensing raises wages in sectors and the price of associated services.

    Any analysis of this type has to stop somewhere. Mine focused on basic goods and poorer families, but one could make similar arguments for other sectors, not least health care and utilities, and some of the analysis applies even more forcefully for those further up the income scale.

    A recent Cato book, Overcharged: Why Americans Pay So Much For Healthcare, documents in lucid detail how the whole US healthcare system encourages high costs for services, for example. It’s not my area of expertise, but no doubt similar logic applies to the university sector, too.

    With the federal budget deficit already large, and most of the ideas floating around all coming with risky unintended consequences, now seems an opportune time for a cost-of-living agenda which examines and undoes these cost-inflating interventions at all levels of government.

    Some goods and services will always be expensive, and there may be a role for government to supplement the incomes of the unfortunate. But we should at least, from a regulatory perspective, aim for a “first do no harm” approach which does not raise living costs for families unnecessarily.

    Rather than treating the symptoms of the financial struggles outlined in Squeezed and talked about every day, let’s do what we can to address the underlying causes.

    Source: https://fee.org/articles/government-is-behind-the-cost-of-living-spike-in-the-us/



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