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Monday, September 20, 2010

Stealth Inflation

You know, there has been a lot of talk lately that we are experiencing deflation and that we shouldn't worry about inflation.  Economists have been saying that when going into or are in a recession you see deflation, not inflation.  Well, yes and no.  Yes, housing values have gone down in price (no brainer there, it was the catalyst for the recession).  Generally it would also make sense that gas prices and non-currency related commodities would also come down in price based on demand.  Although no significant change has occurred in gas prices in this decline.   Sugar, Coffee, Corn, Wheat and Oats have done nothing but go up.

We have not seen a total deflation story in prices though, we see products going down in price slightly or staying the same with one key difference, size.  Yes it would seem size or quantity of the products has been reducing yet the prices are staying the same (called Stealth Inflation).  In case you haven't noticed here are a few examples:
Recently we noticed a box of Kleenex is 20 tissues less.  And before you think this is all about toilet paper and ice cream, well here is a short list of some products that have changed size but not price.  

Chart courtesy of Consumer Reports
There are many other examples, but I think point made.  You might think, well the price is staying the same or in some cases maybe went down a smidge, how harmful is it?  Well a few things; first, even though your paying the same price for the product, your getting less which means you'll be back for more sooner than later (this is a subtle way to increase prices on you without you really noticing); second, CPI is calculated on price changes, well if the price stays the same or comes down a bit (less than the amount they are shorting you) then CPI is unchanged.  Remember, CPI (Consumer Price Index) is a gauge that is used to formulate the cost of living allowance for those in retirement on social security.  Their benefits don't increase if the prices stay the same.  This seems very disingenuous and seems to be going unnoticed.  I know, it is hard to keep up with, because we are all getting our savings hit from so many directions these days.  

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