If you ask me, yes I am worried about inflation (Photo: Brian Snyder/REUTERS)
Apparently, if you want to talk turkey about hyperinflation Thanksgiving is a good time to do it.
There has been a lot of debate recently about whether prices are rising or not. The government’s measure of inflation the consumer price index, or CPI, is up this year but only slightly, around 1%. The Federal Reserve Chairman Ben Bernanke says that’s much lower than it should be for a healthy economy. Some economists are worried that prices might soon begin to fall–the dreaded deflation. Yet, other observers, including presidential hopeful Sarah Palin, say prices are already rising and worry that they will take off once the Fed fully implements its program to buy long-term Treasuries with government money, which many equated to “printing money.” So which is it? Are prices on the verge of surging or diving? Could it be both?
Thanksgiving offers something to chew on for both sides of the inflation debate. If you just go by the turkey alone, inflation does seem to be alive and well, and prehaps out of control. The average price of raw turkey is up 13.3% in the past year to $1.68 per pound in U.S. cities, according to the Labor Department. Go back to before the recent recession started, and the price of turkey has risen a just over 35% since then.
So inflation is up, right? Potentially way up? Not quite. Here’s the problem: Those higher prices for raw turkey aren’t translating into higher costs for the average consumer at least not on Thanksgiving. When the average puts their whole meal together, turkey, stuffing or dressing, potatoes and pie, they won’t actually be spending more than last year, at least not according to the Virginia Farm Bureau. Economist Paul Krugman made this point in a recent blog post:
The bureau says it should cost $43.39 to serve a 16-pound turkey, stuffing, sweet potatoes, rolls, cranberries and peas for 10 adults. The price also includes a tray of carrots and celery, as well as pumpkin pie with whipped cream.
Virginia officials say its survey of grocery stores indicates all that food will cost on average 1 cent more this year than it did last year, when the cost of Thanksgiving dinner fell for the first time in three years.
In comparison, the American Farm Bureau said the average national cost of Thanksgiving dinner this year is $43.47, a 56-cent price increase from last year. [that's a 1.3 percent rise -- PK] The survey was first conducted in 1986 and is intended to be an informal gauge of price trends around the nation.
How can both those prices be right? Could be that all the other things that go into a Thanksgiving feast are falling. Could be that supermarkets are charging less per pound for larger turkeys. Nonetheless the take away is this: Some prices are rising and some prices are not. That’s why both camps can make the argument that we have inflation and we are in danger of deflation at the same time. Like turkey, the prices of raw materials or commodities is on the rise. Corn, Cotton, Coffee. All those things are rising in price. But that doesn’t mean the things we buy actually go up. Despite the 35% jump in turkey prices, the price of foot long turkey sub in midtown Manhattan at Subway, one of the most expensive places to eat on the planet, is around $5, which is the same price it was three years ago.
In fact, just the opposite can happen. Rising commodity prices can actually make deflation worse. When companies have to pay more for raw materials but can’t raise prices of their end products, which is what happens in weak economies like now, their managers have a choice. Some may endure lower profits. Most will either cut worker’s pay, or just cut workers all together. And that’s what those two little cute Bernanke bashing bears don’t seem to get. It’s not that the Fed is trying to prevent falling prices, or at least that’s not what they are most worried about when it comes to deflation. The price of iPhones, flat screens and other gadgets fall all the time, and that’s not a problem. The real thing that the Fed is worried about is wage deflation. When we all make less money we spend less, and it becomes even harder to pay back our debts. That’s an economic spiral that is very hard to get out of. And rising commodity prices make that spiral more likely, not less.
Have a Happy Thanksgiving.
