Inflation is worse than you think

by Philip Brewer on 4 December 2007 5 comments
Photo: earth_photos

I don't just mean that the rate of inflation is higher than the government's reported rate--that's evident to anyone who's paying attention. But there are other costs that come along with higher inflation--costs that strike at the heart of a properly functioning market economy. This post is about dealing with one of those.

The free market works great--as long as certain conditions are met. In economic theory, one of those conditions is "perfect information." For competition to yield the efficiency that economists theorize, every buyer and seller needs to know the price being charged by every other firm.

In the real world we can't reach perfect information, but we can get reasonably close. For example, if you drive past several gas stations twice a day on the way to and from work (and you pay attention), you can be reasonably informed of the local market price for gasoline.

When the inflation rate is very low, there's an easy simplification that saves everyone time and effort--over time, you simply learn what the price is for many of the things you buy. Prices that stay stable for months at a time are easy to remember, and when that price changes you can assume that it's a real change in price (not just inflation working its way through the system).

Just in the last few months, inflation has climbed to the point that it invalidates that simplifying assumption--you can't just assume that the price will be the same as last month. As Paul just described in his recent post, this gives merchants cover to play fast and loose with the regular price, knowing that you can't keep track of everything.

The tactical solution is what Amy Dacyczyn calls, in her classic book The Complete Tightwad Gazette, a "price book." A price book is just a notebook, with a page for each item that you buy, where you record prices that you've seen, noting down the date and which store had that price. (For items that come in multiple sizes, note down the package size and also calculate the unit price.)

That's the information that you need to know in order to figure out if you're getting a good deal. You certainly can't trust the store to be up front about regular prices. But with a price book, you know what other stores have been charging over the past few months, so you can see whether a so-called sale actually gives you a discount from what you'd pay elsewhere. When inflation is running high enough that you can't just remember prices, a price book is the only way to make wise decisions about things like stocking up.

Of course, this is extra work on your part--that work is one of the many hidden costs of higher inflation. Especially bad, it's a cost that needs to be paid by every market participant. (Some pay it by undertaking the record-keeping burden. Others pay it by accepting that they'll more often overpay for goods.)

The strategic solution, of course, is to get inflation back down to the point that the simplifying assumption--that the current price is the same as last month's or last year's price--is valid again. Unfortunately, the Fed is moving in exactly the wrong direction for that.

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Rob in Madrid

It is quite an eye opening experience when you first start to use a price book, you quickly realize you perception of what things cost is way off. Usually on the high side. A price book offers another advantage, instant shopping list and if you do it in Excel you can quickly calculate how much something will cost. A price book will save you around 10-15% off your shopping enough but not massive amounts. Let me rephrase that, inspite of the huge jumps in the price of some things I'm still below what I used to spend pre price book times. Another advantage is it makes you a much better shopper, particular if you combine it with a recipe planner.

The only negative to a price book is you become really sensitive to price increases. I just about died when I walked in the store and found have the things I bought jumped alot in price. Coffee up 30%, cookies almost 100% so on and so forth. It was a big shock, but on the other hand when a bunch of stuff went on sale I really stocked up.

Guest's picture

I did a price book for a while. I took weekly shopping receipts and put them into excel, similar to the price book idea. Prices on things were fluctuating wildly. I think you really need to add a high and a low for each item so you can get a better idea where the cost for that item is. We also try to be creatures of habit, buying the same thing frequently. I know off the top of my head the price for pork loin, milk and target brand toilet paper because we buy those things all the time.

I found many items that were going up 100% or more and just about everything you buy as far as groceries went up and is staying up. This caused us to dump many pre-packaged products we used to buy or we only buy them when they are on sale. $3.76 for a box of triscuts, I don't think so. They were $1.76 a year ago so now I wait until they go on sale for $2 a box or less and stock up or do without.

Guest's picture

This is a good idea. I wish I had more time to do this, but I don't. My father-in-law does it, and he goes to a half dozen stores each week for deals. Of course, he probably spends more on gas than he saves on groceries.

I wouldn't put much credence in the government's CPI data. I have seen reports that examine inflation based on the calculation used before it was changed during the Clinton Administration. Using the old formula, inflation is running 7% year over year, not this 2.5% that the government now reports. I wonder what the inflation rate in the 1970s would have been using today's formula. Probably not double digit rates.

Guest's picture

About prices...
As you probably noticed, "regular" pricing doesn't mean very much any more. Many major retailers seem to ignore "regular" prices and sell at 40% off on a regular basis, and never never at the "was" price. Food chains also play fast and loose with "regular" prices.
Some 40 years (or so) ago, the FTC enacted regulations that governed pricing, warrantees, and advertising in general. As far as I know, these rules are still in effect, although my guess is that most retail managers and employees don't get too involved. It was different "back then". When the laws were enacted, it was a major learning/training experience in the retail business. "Back then" meaning when laws meant what they said, and businesses were at risk for straying from the straight and narrow. It was about that time when the "Truth in Lending" laws became a major factor in "time payment" and revolving charge sales. In both cases, the FTC was effective in enforcing these laws.
Of course, this is all history now. Laws may be on the books, but enforcement is never initiated by the government. To challenge a retailer's deceptive advertising, now requires that the victim initiate the lawsuit, something that happens as often as pigs fly.

just as a matter of interest, you may want to take a peek at the laws.

Strangely enough, a close look at the actual prices in the government's CPI index marketbasket is quite far from reality.

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Check out

John has been going thru the official stats...the Administration does report the truth about the economy...but only in the ULTRA FINE print.of the reports (example: Unemployment is between 12 to 14%)