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Smaller Amounts, Higher Prices—Is this Stealth Inflation?
Tuesday, March 29, 2011 - 5:27pm
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Is it stealth inflation? The New York Times today says more and more food products, such as pasta and tuna, are coming in packages containing less of the item at the same price as before. The pattern suggests companies are attempting to cover some of the sharply higher costs of various commodities over the past year. Effectively, the unit cost of a box of crackers is higher, but so is the unit price, so profits margins don’t take a big hit. Shoppers—at least the ones who notice the change—say they are paying more, but the effect on inflation is hidden, they say, since it looks like the same bag of potato chips.

However, it’s not the same bag of chips to the people at the Bureau of Labor Statistics who calculate the Consumer Price Index, the most popular measure of U.S. inflation. Each month BLS sends about 400 data collectors to thousands of retail stores and service businesses to record the prices of some 80,000 items that make up the CPI. The researchers gather price data on a specific good or service that was precisely defined on an earlier visit. If the quantity changes, the data collector records the change in the current item, and the change is incorporated into that month’s CPI.

BLS economist Steve Reed says if a two-ounce candy bar, for example, suddenly becomes 1.8 ounces at the price of the old size, that change is converted to an 11 percent price increase. “We’re not mismeasuring inflation because of quantity changes of this type,” says Reed. Data analysts also make other checks for accuracy and consistency, along with other more complex quality adjustments that analyze changes in the value of an item’s features that may affect its quality.

As the Times points out, product downsizing during recessions is an age-old practice, and this time companies have plenty of incentive to control unit costs. Over the past year, BLS says prices for crude foodstuffs are up 29 percent, including increases of 10 percent for raw cane sugar, 46 percent for soybeans, 80 percent for wheat, and 91 percent for corn. Overall, wholesale prices for finished consumer foods have jumped 7.3 percent in the past year.

But at the retail level, food inflation has been more modest. The CPI for food is up 2.3 percent from a year ago, only slightly higher than the overall 2.1 percent overall inflation rate. To some extent, companies are swallowing the higher cost of commodities, because materials generally are only a small portion of total production costs. Labor costs, which typically account for about 70 percent of a company’s costs, have been very subdued, with hourly wages making little headway. Reflecting strong productivity gains, unit labor costs actually fell last year.

For consumers, the combination of tepid wage growth and lighter cans of tuna that cost the same as before are sure to feel like higher inflation, and to them, it certainly is. But to the BLS, it isn’t.

James C. Cooper
was BusinessWeek's senior editor, senior economist and author of its influential Business Outlook column. Prior to that, he was an economist at the American Paper Institute, performing economic analysis and forecasting. He holds bachelors and masters degrees in economics.