Are We Suffering from Concealed Inflation?

Steven Horwitz

Those of us who find the more-than-doubling of the Fed's monetary base to be highly troubling have used all kinds of metaphors to explain why it's a problem even though we haven't seen any measurable price inflation yet.  (My favorite is "ticking time bomb" which also allows me to point out that the Fed better cut the wires in the right order if it is to be successfully defused.)  The conventional explanation for the lack of price inflation is that banks are sitting on the reserve because the interest the Fed is now paying is a better deal than lending in a risky environment.  I think this point is largely true, but it also may be that we are suffering from inflation that is not being accurately measured.

I'm not talking here about the usual problems with the CPI, but something a little more subtle.  For lack of a better term, I will call it "concealed inflation" (not to be confused with "repressed inflation" where prices are officially controlled).  To see it, start by comparing these two juice cartons:

To the naked eye, they look identical, but if you look closely the Florida's Natural carton is slightly taller.  Notice how the crease toward the spout is just a bit higher.  Or consider this angle:

You can see the Florida's Natural carton is a fraction of an inch wider.  (If you think it's a trick of the angles, my apologies for my crappy photography, but trust me, as you'll read in a second.) 

And indeed the Florida's Natural carton holds 64oz of juice while the Tropicana holds 59, making it about 8% smaller than the FN carton.  And, in fact, Tropicana's cartons used to be 64oz, but were recently shrunk to 59.  If you eat tuna fish, you may have noticed the ongoing shrinkage in the size of the standard can of tuna, which used to be 6oz and is now 5oz.  I have noticed Chunky soups going from 19oz to 18.5 and some canned tomato products going from 15oz to 14.5.  Jody noted that the Dial bath bars we use have a new curved shape that makes them slightly smaller than they used to be.

Most of these differences are not obvious to the casual shopper.  I only noticed the juice cartons the other day and noticed the tuna cans when I had one of each size in my hands and they didn't quite fit together the way they usually do. 

The other piece of the concealed inflation story is that the shrunken products sell for more or less the same price as the older, larger sized ones did.  In the case of the juice, the standard price at my local grocery store has been around 2.99 for some time.  Tuna prices have stayed about the same as well.  But 2.99 for a slighly smaller carton is functionally equivalent to a higher price for the old, larger one. 

For the juice example, the larger carton cost 4.67cents/oz while the smaller one costs 5.07cents/oz.  A little math indicates that if the price stays at 2.99 for both, the shrinkage in the package amounts to a price increase of 8.56% measured by cents/oz.  If Chunky soup costs $3 per can, the shrinkage from 19oz to 18.5oz amounts to a price increase of 2.72%.  A 75 cent can of tuna that shrinks from 5.5 to 5oz has seen an almost 10% price increase.

These are not outrageous increases, nor do I have a good sense of the time frame over which they are taking place, but it's still noteworthy, I think, that this product shrinkage seems to be taking place across a variety of items without any reduction in price that I can see. 

To be clear, I don't think this argument suggests that we are suffering from significant inflation, but it does suggest yet another reason that the CPI may be understating matters if it does not adjust for changes in standard product sizes. [UPDATE:  Yes the CPI attempts to account for those changes in product sizes.  I should have checked that before posting the entry, which is also why I phrased it as an "if".  They all can't be home runs folks. Thanks to those who pointed it out.]  It's also a good piece of advice for households to keep an eye on product sizes if you're beginning to wonder what happens to your grocery bill every month.

If you have other examples, and especially if you have photographic comparisons like the juice cartons, please feel free to send them my way.  I'd love to collect them all in one place.

Comments

[William]

"During each call or visit, the economic assistant collects price data on a specific good or service that was precisely defined during an earlier visit. If the selected item is available, the economic assistant records its price. If the selected item is no longer available, or if there have been changes in the quality or quantity (for example, eggs sold in packages of ten when they previously were sold by the dozen) of the good or service since the last time prices were collected, the economic assistant selects a new item or records the quality change in the current item."

http://www.bls.gov/cpi/cpifaq.htm

Tropicana defends its use of the 59 oz. package:

http://tropicana.com/?jr=1#/trop_home/home.swf?/trop_carton/carton.swf

[Steve Horwitz]

It will be interesting to see (think Higgs here) whether the 59oz carton sticks around after the temporary conditions that supposedly produced it have passed.

The funny part about their explanation is that they claim they are being sensitive to consumers' price sensitivity, but don't acknowledge that this IS a price increase and pretending like it isn't means they think consumers are pretty stupid. Maybe they are, maybe they aren't. We shall see.

[Current]

It's interesting that lots of places in Ireland have semi-permanent "special offers". So, rather than noticeably increase prices they can withdraw the offers later.

[Tom Dougherty]

Remember not too long ago you could buy 1/2 gallon of ice cream. Then it was cut to 1.75 quarts. Now, ice cream comes in the 1.5 quart size. Instead of raising the price of ice cream, the ice cream containers have gotten smaller and smaller. The nominal price of ice cream per container has remained constant, but the real price of ice cream just goes up and up. The response from Breyers and Edy's is that the price of the ingredients have gone up, but to stay competitive the container sizes have been reduced.

[spencer]

From bank reserves to inflation is a multiple stage process.

1. Banks make loans -- bank loans are still falling.

2. The loans create money -- most measures of money supply show the money supply actually contracting.

3. the increase in the money supply causes nominal GDP to increase. -- As of the second quarter the increase in nominal GDP was still under 3%.

4. Nominal GDP growth leads to greater real GDP growth and tighter use of resources -- the gdp gap is still growing.

5. Tightening GDP Gap causes wages and inflation to rise.

While you ignore these steps you are trying to make an argument that the professionals at the bls are so stupid and ill informed that they do not capture when firms change the size of the container.

You are suppose to be a PhD economists. Surely at some point in your education someone taught you better than this. Didn't they?

[Jerry O'Driscoll]

Steve,

I think you've raised an important point. But what does it say about the "rationality" of consumers?

[Mike Sproul]

Steve:

The reason prices have not reacted to the increased money supply is that when the Fed issues a new dollar, it normally gets a dollar's worth of bonds in exchange. The Fed is therefore able to buy back all the new dollars it has issued, since the Fed's assets have risen in step with its liabilities.

You have to keep in mind that those new dollars were not just dropped out of a helicopter.

[Steve Horwitz]

Thanks for the primer on monetary economics Spencer. I think I know how monetary expansions work, thankyouverymuch, although I'm not sure I'd agree with YOUR particular framing of it.

And if you'll note, I *asked* whether this was a problem and explicitly said *if* the BLS does not account for it, then there's a problem. I didn't make assertions, I asked questions. Seems to me that a blog is a good place to ask such questions for the purpose of beginning a conversation. Unlike say, a journal article, where I'd never be so casual.

But thanks for your little lesson, wrong though I think it is in places. I'm hoping somewhere in your own education, someone taught YOU better than that. I'd also like to think someone taught you better manners, but apparently not.

[Steve Horwitz]

Jerry:

Yeah, I think that's an interesting question too. Tropicana apparently thinks consumers aren't all that smart. There's all kinds of interesting elasticity questions here too.

[FC]

"You are suppose to be a PhD economists. Surely at some point in your education someone taught you better than this. Didn't they?"

Points will be deducted for grammar and spelling errors, smart guy.

[Tom Dougherty]

The grocery stores I shop at contain not only the price of the product but also the unit price of the product. The unit price information makes it more difficult to fool consumers with a reduction in quantity, but still the practice of quantity reduction continues. Will Florida's Natural reduce its carton size or will consumers see through Tropicana's stealth price increase?

[Steve Horwitz]

In thinking about it, especially the consumer rationality angle, it seems to me this would be a great lab experiment, if it hasn't been done already.

[Lee Kelly]

Twixes have gotten a little bit smaller recently.

[Jerry O'Driscoll]

Dteve,

Marketers talk about "price points" and such matters. As you suggest, it may be about elasticities. At some point, if inflationary pressures are sustained, we'll see it picked it up in CPI.

[Greg Ransom]

Go to Costco.

The size of a can of tuna has grown at that store.

Coffee companies and ice cream makers have been doing this sort of thing for years, pre-Bernanke.

[Zach]

It might be that producers are trying to slip a price increase past unobservant consumers, but it could be something else.

Consider that consumers can only buy products in discrete, predetermined units. So the producer has the option to pass a price increase on either by increasing the price or by decreasing unit size.

If consumers have a fixed budget for groceries, increasing the price and keeping package size the same might force consumers to completely eliminate some items instead of scaling back everything proportionally. Reducing the package size allows the consumer to spend the same amount of their weekly budget on that product and therefore there is less pressure to drop something from their shopping lists; the producer does the scaling for them. (With the added benefit of having control over how the change will be scaled. I bet the cross price elasticity of orange juice is pretty high relative to milk. Reducing the size of OJ containers lets consumers continue to spend $3 on OJ and $5 on milk without worrying about quantity.)

If you were a risk averse product manager, would you bet that your orange juice is going to stay on shopping lists while tuna fish or canned soup or milk gets dropped instead?

[Ryan M]

So consumers may be fooled, but would these effects fool national accounting measures? Given what William posted, I can't imagine this really screwing up CPI that much.

And if it's the case that firms selling consumers' goods are somehow able to hide inflation this way, it's not necessarily true that firms selling producers goods can. Meaning, it's a little bit harder to psychologically screw with how much steel is in a ton of steel. That being the case, there would be a substantial discrepancy between CPI and PPI, and I don't believe one exists.

Besides, if we want to invoke the Robinsian maximizer, the simpler answer would just be that consumers' tastes have changed, or at least that their elasticities relative to carton size are less than their elasticities towards price. In the absence of macro level evidence suggesting otherwise, I don't see reason to reject the kneejerk neoclassical answer to this.

[FC]

Orange juice is a luxury good for me and my preference for Tropicana is worth much more than the price of 5 ounces of Florida's Natural.

[Jared Barton]

Prof Horowitz,

1. If the BLS hadn't been accounting for changes to the size of identically-composed products, this would represent a one-time shock to the CPI, not ongoing inflation. So CPI changes would understate inflation for exactly one measurement period.

2. The kinds of adjustments that BLS makes to the raw price data are not very mysterious; they're laid out pretty clearly in BLS Handbook of Methods (http://bls.gov/cpi/research.htm). Their adjustments for quality are definitely suboptimal (see 3.1 below for the net effect of that, though), but the price-per-unit thing is pretty easy to take into account.

3. Even sans Handbook, this claim does not seem to be correct: "...but it does suggest yet another reason that the CPI may be understating matters if it does not adjust for changes in standard product sizes." If you're not too busy, would you please write an addendum or a correction to that end? The explanation given for "concealed inflation" actually doesn't work; the change, far from being concealed, is actively incorporated!:-)

3.1. A small question: you say this is "yet another reason" CPI might understate inflation. It's my understanding that the general consensus (the 1996 Boskin Commission report, or see Bils--http://www.mitpressjournals.org/doi/abs/10.1162/qjec.2009.124.2.637--for a more recent estimate and discussion of subsequent literature) is that the CPI *overstates* inflation. What evidence is there of a net understatement? Right now, you make it sound as if this is but one more piece of evidence for a generally accepted view, when it appears that the generally accepted view of the profession is quite the opposite.

4. The behavioral story you bring up here is very neat. If we assume that consumers didn't just see through this repackaging, how does it work? And why isn't it announced by Florida's Natural? Gabaix and Laibson (http://www.mitpressjournals.org/doi/abs/10.1162/qjec.2006.121.2.505?journalCode=qjec) have a story for why Florida's stays mum about it *given some fraction of consumers that are myopic about 'shrouded' attributes*. But I don't know if anyone has followed up with a good explanation of why that fraction would be myopic in the first place.

[Jared Barton]

Oh yeah--please strike "correction" from (3) above. My bad; there's nothing incorrect as the final statement is presented with caveat. But it would be nice if the main post clarified that, in fact, size-of-packaging is taken into account by BLS all the time, and cannot be a source of understatement of CPI as such.

[Pietro M.]

There are two things that don't convince me.

1. The Fed pays 0.25% on reserves, i.e., almost zero. This can't be a relevant factor, except if we assume that returns on investments have fallen and/or risk aversion has risen. The former prediction is contained in the ABCT, the latter is quite obvious for psychological reasons (and a reduced trust in the omnipotence of the Fed). It's not the 0.25% that makes the difference: investment returns are insufficient to cover risks and the cost of funding (i.e. almost 0%).

2. I wouldn't look at M0 to predict inflations, at least not during (or after, depending on optimism) a banking and financial crisis. M0 may have boomed, and M1's rate of increase is large (5-10%), but M2 is constant and MZM is decreasing. This means that on average quasi-moneys are still depressed and the higher use of notes or deposits (M1) may just be substitution from credit money to money proper. This process need not lead to inflation, at least so far as the supply of quasi-moneys start to skyrocket. This may happen in the future, but so far it hasn't happened, and prices can remain calm. Because monetary aggregates are influenced by economic conditions and the health of financial intermediaries, there may not be a bout of inflation before the recovery really starts, and I'm not that confident it will happen soon.

[Stephan]

Steven,

I must admit I'm envious from a European perspective about the problems you are worrying about. Is the FED assessing the inflation risk the proper way given the size of orange juice packaging?

Look what morons we've at the ECB: "The European Central Bank, which has championed fiscal austerity across the continent, has scolded Romania’s government for forcing a 25 per cent pay cut on employees of the country’s central bank. In a strongly-worded statement, the ECB on Monday warned that Romania’s actions violated European Union treaties allowing monetary authorities to operate freely and without political interference. It presaged a similar showdown with Hungary’s government, which plans to cut its central bank governor’s pay." (Financial Times)

Our Central Bankers worry about the essential thing: their wages ;-) Austerity YES but not for us!

[twitter.com/aniceberg]

Murray Rothbard mentioned this same effect years ago, in his case it was regarding the quality of a chocolate bar--

"All sorts of monstrous situations will occur. Decline in quality, for example. We will find that there will be more air in the Baby Ruth — you can't find the Baby Ruth anymore anyway. There will be less chocolate in the chocolate. There is no way the state can police this, of course. And it's very harmful to the public." --http://mises.org/resources/2667

[Ronald Pottol]

At least the first Bryers shrink happened years ago, before the bubble burst, I remember it.

We are at the zero bound, expect monantary supply related things to be very weird.

[Nikolaj]

Steve,

you contend that the monetary expansion carried out by the Fed in the last two years was really unprecedented and that inflation is already there, although the CPi is not catching it still.

What's going to happen (and what is happening currently) to the general inflation is an important thing, of course. However, I think it is even more important and interesting to see what is going to happen (and what is happening already) to the industrial structure as a consequence of the same inflationary process. If you are right in this post, then the easy money emitted by the Fed 2008-2010) is already finding its way into the real economy (contrary to what the conventional story about the "excessive reserves" tells us). So, the inflationary "heating" is well underway. However, if that is the case - would not then the "malinvestment" also be underway?

I know that you deny that the monetary and credit expansion creates any malinvestment during the recession. However, if your present analysis is correct, we are already in the monetary boom. One should expect the malinvestment distortions in the productive structure to occur, even from your theoretical standpoint. Therefore, insofar as your present analysis stands, we are poised for a new, and possibly even worse recession-depression, correct?

[Barkley Rosser]

Jerry is right about price points and so on. There is a surprising amount of gullibility out there on the part of consumers. Just think about how gasoline prices are always something and 9/10 of a cent per gallon, but people will say that the price is the something rather than the next cent up in price, and others do this as well all the time.

Anyway, Steve, I guess you have nailed it. All this downsizing has got to be due to the Fed sitting on all those piles of MBS's that were supposedly propping up the now newly-collapsing-again housing market, :-).

[Steve Horwitz]

N wrote:

"I know that you deny that the monetary and credit expansion creates any malinvestment during the recession."

Sigh. You know, I might actually be interested in responding to your comment if you would stop lying about what I've argued.

I have argued:

a. increases in the money supply that enable that supply to match the demand to hold money at the current price level avoid many more problems than they might cause.

b. At the onset of the crisis in 2008 it was certainly possible that there was an increased demand for liquidity/money balances that a central bank should have accommodated with an increase in the money supply.

c. However, what the Fed actually did and continues to do is WELL beyond that which would have been necessary and appropriate under a monetary equilibrium view.

I have never argued, nor do I believe, that monetary expansions during recessions are always appropriate. Nor have I ever claimed that such expansions during recession will not cause malinvestment. It simply depends upon whether that increase in the money supply puts it in excess of the demand to hold money at the current price level. That might be true; it might not. I have persistently criticized the Fed for overdoing it and written several pieces warning of possible inflation (to come).

So please stop mischaracterizing my views. I do hope the above is sufficiently clear so that you'll stop it. We've been over this so many times that I can only assume you are intentionally lying about what I believe in order to score points. If not, you really do have a serious reading comprehension problem. Neither option makes you look like anything resembling a serious thinker.

[Matt C.]

Bob Murphy had a post on this several weeks ago...link below.

http://consultingbyrpm.com/blog/2010/05/sneaky-price-inflation-suppression.html

[Tom Dougherty]

On Florida's Natural website you can view the different products they sell. However, if you click on the juice box, the 64 oz carton size is missing from the bottom left-hand corner. Also, they compare their OJ to Tropicana's noting that their oranges come from the USA and Tropicana's come from USA and Brazil. But no mention of carton size, however. Are they not mentioning carton size because they too are planning to reduce its own carton size to match Tropicana's? If not, why wouldn't the larger carton size be a selling point?

http://www.floridasnatural.com/juices/original-orange-juice

[Nikolaj]

Steve,

when pressed during one of the previous debates here you said that if "supply matches the demand" the credit expansion does not have any distortionary effects in recession. You actually repeated that a couple of times. That's everything I claimed. The credit expansion during the boom has always the distortionary effects while it does not have the same effects during the recession. I don't want to engage again in the same futile conversations about the demand for money and all the rest. If you would like, I can amend my interpretation and say that you actually think that the credit expansion during the recession does not create the malinvestment if it is not too large,i.e. if the additional supply matches the unanticipated increase in demand (whatever that might mean from the practical point of view. I don't know, but you claim to know).

However, all that was of secondary importance for my point. The central problem I wanted to emphasize was (and you would notice that as well, if you were not so thin-skinned) that the main problem with the Fed monetary expansion was not only in creating the CPI, but primarily in preparing the ground for the next crash/boom. If you accept the ABCT in general, and you also concede that the Fed "overdid" this time in its zeal to "match" the demand for and supply of money (whatever method you might have been applied in order to establish that diagnosis), then, clearly, the main threat is a financial and economic crash ahead, and not (only) the general inflation.

[Steve Horwitz]

N:

I agree with much of what you say, and I've argued as much in other places.

And I'm really not thin-skinned. I just get pissed off when people distort my views, which you have *consistently* done on this blog for as long as you've been commenting. You get it right this time with the sentence that includes "if supply matches demand..." but that's not what you said in your original comment, which made it appear that my view is that monetary expansions in a recession can NEVER cause inflation/malinvestment.

Your words: "I know that you deny that the monetary and credit expansion creates any malinvestment during the recession." There's no qualification about money demand there. None. As written, that statment is a false description. So just admit you got it wrong and we can move on.

It's not thin-skinned when the other person really is distorting your views.

I think from now on, instead of actually going to all this trouble, I'll just post a Reaganesque "there you go again" and use my time more valuably.

[Evan Harper]

"To take the most straightforward example of quality adjustment, which the CPI handles automatically, suppose the maker of a 1.5-ounce candy bar selling for 75 cents replaces it by the same brand of candy bar, still selling for 75 cents, but weighing only 1.0 ounce. If the shrunken size is ignored, it looks like the price hasn’t changed. The CPI, however, prices candy and most other food items on a per-ounce basis and would automatically record a 50-percent increase in the quality-adjusted price of the item, from 50 cents per ounce to 75 cents per ounce." (http://www.bls.gov/opub/mlr/2008/08/art1full.pdf)

[JCE]

Oh please. Steve, why don't you just admit that your theory is wrong?? Ever hear of Occam's Razor?? Isn't simpler to say that money velocity has fallen drastically (much more on absolute value than the increase in the base) than to say that there is 'concealed inflation'by looking at juice cartons??? When has any economist ever talked about 'concealed inflation?? In what model is it a relevant variable??

You're a joke.....
Brad DeLong is correct....once again

[Barkley Rosser]

JCE,

This is not a matter of falling velocity. It is a matter of monetary base expansion not turning into an expansion of the money supply, for a variety of reasons, although V has fallen somewhat.

[Robert Weiler]

It would be nice if you could acknowledge that the CPI does in fact take into account changes in product size and quality, and that therefore, your speculation that this is resulting in inflation that is 'concealed' from the CPI is in fact wrong.

[Steve Horwitz]

Robert:

Done. I had meant to do this earlier when others pointed it out but kept forgetting.

As I said in the update to the post, I should have checked that first, but didn't. My bad. At least I was careful enough to phrase it as an "if."

And yes JCE, I will happily admit that I was wrong (which is more than DeLong has ever done, but we once again thank him for the traffic). It happens from time to time.

I still think it would be interesting to get in the lab and see how people perceive these sorts of changes in product size and what the relevant elasticities are. It's also interesting to think about what sorts of products are more or less likely to get this treatment.

[Ned Baker]

As a non-economist, I'm having trouble reconciling your concerns about inflation due to monetary base expansion with (1) declining MZM and (2) M1 money multiplier falling off a cliff. Can you connect the dots?

[Bill Stepp]

Steve,

I just wasted a few seconds looking at BDL's blog, where he calls you "the stupidest man alive." As always, he's a class act.

[R.D. Alcala]

BDL just says that for effect, he's getting a bit cantankerous these days. But that was some dumb blog. It was like Abe Simpson and Rosanne Rosanna Dana co-wrote it: someones concealing inflation inside my orange juice! The chunks in my soup are smaller, there's less tomatoes in my can, and my fish doesn't fit my hand anymore! The CPI should get on this, I want they should weigh my cartons, measure my tuna and...oh...never mind.

[Joe]

At Kraft, shrinking your product size had three main benefits:

1) Package costs reduced
2) Less stuff sold for same price (Reveneus up!!!)
3) Promotion!!!!!

Joe

[Splintrecords]

I have noticed that toilet paper rolls have shrunk in width (I buy Quilted Northern).

[Robert Weiler]

I don't actually doubt that some products have gotten more expensive. The important thing is that the CPI measures prices of a lot of things, in particular, it includes housing which for most people is by far their largest living expense. The huge, and continuing, decreases in housing costs, combined with 10% unemployment, makes inflation as measured by the CPI virtually impossible. And unlike the CPI, it is well known that most measures of official unemployment under count the actual number of unemployed.

[R.D. Alcala]

The Consumer Price Index does indeed measure a lot of things. It also offers specific accounts on the price changes of a lot of things (including orange juice). Food and sundries prices always fluctuate from month to month, but there is no appreciable rise, if anything there is a slight downward trend. Even disregarding housing, there simply is no evidence of real inflation at the moment.

[andrew]

food commodity prices are left out of inflation calculations bc food prices are volatile...if we followed food prices as a measure of inflation then in a few years we would also all be crying about deflation as well - "oh no, the tropicana carton got bigger but sells for less! prices are falling! deflation!"

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