Thursday, May 27, 2010

Food Inflation is Back

The Bureau of Labor Statistics (BLS) recently reported that the seasonally adjusted consumer price index (CPI) dropped .1% in April. In other words, inflation is under control, and perhaps deflation is in the future. Mortgage rates are at a 30 year low; gas prices are dropping before Memorial Day, when they usually rise.

Excluding the volatile fuel and food prices, the index remained constant, although it is up 2.2% over the past 12 months.

Do you believe the numbers or your own eyes?

You can read arcane BLS reports about CPI changes.

Or you can go shopping at the supermarket.

When I was young, all we had to do was checkout the Hershey chocolate bar at the grocery store. Hershey’s tried to maintain its famous nickel candle bar by adjusting its size as the cost of cocoa fluctuated. Forget any government adjusted or unadjusted inflation rates; Hershey was the test of inflation.

At the supermarket, where we feel inflation most immediately, prices are rising, offsetting falling fuel prices. Food was up .2% in April and .5% over the past 12 months.

Today’s food companies are subtle; they are raising prices indirectly by shrinking quantity, size, and volume while maintaining list prices. In short, we pay more for less.

The ice cream companies led the way a few years ago in a two-step process of shrinking carton sizes from 64oz to 48oz, a 25% cut.

Tuna cans shrank 23.2 % from 6½ oz to 5oz. At this point the tin almost outweighs the tuna. 8oz Yogurts are now 6oz (down 25%).

Halloween candy was once 16oz bags with an additional “10% free.” Now the bags are 11-12oz with nothing “free.” They even cheapen Halloween! At least Mike and Ike still offers "The Big Box," 9 1/2oz, but you have to look for it.

Pepsi, with its assorted beverage and Frito Lay products has been especially aggressive in cutting sizes. 24 can cases are now 20 can cases (16.7% reduction) while the company is experimenting with 4 packs. No tall boys for Pepsi. They’re also peddling smaller sized cans. Its 24 oz. Pepsi bottles are now 16.9oz containers (roughly a 33% cut in sugared water). Watch the magic as Tropicana orange juice shrinks before your very eyes to 59oz cartons instead of the traditional 64oz.
The Lay’s and Doritos went from 16oz to 10 1/2-11 oz., but it is now featuring a “Family Size” of 14oz.

The historical, traditional, classic baker’s dozen has been reduced to a true dozen.

Nabisco is also playing this game. Ritz and Honey Grams have gone from 16oz to 14.4oz, a 10% cut in size. Wheat Thins and Triscuits are down to 7, 8 ½, 9, 9 ½, 10oz packages depending on are they the original, low fat, less salt, etc. It’s all very complicated.

The cereal companies are playing the same game, but they offer the cereals in so many different sizes that it’s difficult to figure out what the cuts are. At least the actual hole in Cheerios has not yet grown.

The packaging often seems the same, but now it may contain 4-50% slack space.

The food processors can claim they are doing it to benefit us, the consumers: lower size, fewer calories, less fat, less trans fats, less sugar, less salt; they're helping us diet.

The food inflation started over two years ago when energy costs soared. One of the highest costs to the food industry is transportation. When gas and diesel reached $5 per gallon, the food industry, which distributes mostly by truck, felt the pain.

When petrochemicals are in the packaging, as with bottled waters, the industry was doubly hammered. The bottled water industry found an ingenious way to cut costs, reduce petrochemical consumption, and aid the environment. They figured out how to keep the basic water bottle at 1 liter, but substantially reduced the size of the plastic container by over 20%. They substantially reduced the packaging. That's efficiency, waste cutting, and green.

The chemical companies double cut in their detergents. Arm and Hammer’s standard size is now 32 servings, essentially cut in half. The plastic container has similarly shrunk.

Paying more for less is inflation.

It's certainly more than .5% over the last year.

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