“Deflationists” Ignore Quality, Quantity Reduction

By Aaron Krowne

In a recent piece, my colleague Mike “Mish” Shedlock expresses continued skepticism about the likelihood of inflation surfacing in US retail prices, regardless of inflation in China or elsewhere in the developing world (and regardless of whether they are direct goods suppliers).

His skepticism is of course justified — we have not seen radical levels of inflation in US retail prices, even with higher produce prices, and lots of money-printing by the Fed.

But I think Mish and similar-spirited commentators place an excessive emphasis on “deflation” when discussing this phenomenon.   I have to say, I feel something is wrong when I compare this deflationary thesis with the ever-increasing amounts I am paying for basic needs expenses.  Thus, I am quite sure the “deflationists” are ignoring meaningful “non-price” inflation-related trends at the retail level.   And somehow these consequences are going into expenses, though perhaps not on a direct per-item comparison basis.

One phenomenon that is probably generating this outcome is a reduction in unit quantities.  This has been especially a factor in retail foods, and is beginning to be noticed.  For example, the “standard” yogurt container size has gone from 8oz to 6oz in the last few years.   Virtually every other sort of food and basic household product container has been similarly down-sized in the last couple years.   I estimate these constitute 10-25% effective increases in product price … without the “sticker shock”.

A second likely contributor I have not heard discussed at all quality reduction.  This manifests in areas such as clothing, where, e.g., less thread can be used to achieve the same superficial effect.   I have no numbers here, but in my experience, clothes are being made more shoddily and not lasting as long as they used to.  This has even extended into putatively “high-end” goods, such as those carried by Nordstrom’s.  Frankly, it all seems like crap to me now.    I now regularly see fraying (to the point of unravelling), tears, and popped buttons on items immediately back from the store (and no, I haven’t gained weight).

Logically, the consequence of both unit quantity and quality reductions like these would be the need to make more repeat purchases to replace the goods.  Again, anecdotally, I am indeed experiencing more trips to the grocery store, and more to the department store, to replace accelerating worn-out clothing.   Neither of these factors would show up in item price comparisons … but would show up in the consumer’s bottom-line.

I wouldn’t be surprised if 5-10% a year inflation is being “hidden” this way.  I would be interested to hear what others are seeing in their daily budgeting.

Ultimately, this “cheapening” sort of deflationary effect will come to an end.  There is only so much you can insult consumers in this way simply to hide a nominal price increase.   Also, as the pool of retailers shrinks (Mish himself points out every significant bankruptcy), the pricing power of those left standing will increase.  When these trends come to a head, resurgent old-fashioned CPI inflation will likely come as a surprise to economists… and anyone else with a “deflationist” bent.