Invisible Inflation continues

[cute fuzzy bunny]

I posted on this last year, however that post was hijacked into feeding extra rib eye steaks to your dogs.

The idea being that CPI measures actual changes in the price of a basket of products, but inflation that isnt measured happens when products are cheapened or reduced in quality or quantity, yet the price remains the same.

Last year I noted that my favorite bbq joint started charging 50c for extra sauce. Most of the places in the food court at the mall stopped giving free drink refills. Beer coming in 10 and 11oz bottles that used to be 12. Dog food that used to be in 16oz cans now coming in 14oz. And so on.

We've had plenty of stories of customer service being reduced to the point where its little more than a waste of time to get help for a product. CPI doesnt measure having to spend hours of your own time fixing a problem or trying to get a manufacturer to resolve a product issue, or time spent in a return line. Thats a cost drag, it just isnt measured by the CPI.

It continues, in interesting little dribs and drabs.

My favorite mexican place used to serve a big scoop of guacamole with all their meals and Gabe likes guac, so thats usually his lunch when we eat there. No more guac, its gone from the plate but can be had for a buck extra now. One of the local steak places has a 'steak tips in mushroom sauce served over rice pilaf' that I like to get. Over the last year I've noted the steak tips getting fewer and thinner and the mushrooms getting more plentiful. Lately both are receding and being replaced with more sauce.

I installed a screen door today. These used to have a metal 'U" channel on one side and on the bottom to adjust the door to fit the door frame. The bottom metal "U" channel on this one was apparently recently replaced with a thin plastic strip you're supposed to screw to the bottom of the door...that'll last about 2 weeks before its broken off...the instructions still note the adjustment of the U channel on the bottom thats no longer there.

I'm not sure how far these 'screws' can be turned. I cant imagine customer service getting any worse. Seems product quality and quantity is being noticeably reduced, at least in things I buy and use.

Is there a cost drain here that is going to eventually hit bottom, at which point prices will dramatically increase?

 

[Nords]

Is there a cost drain here that is going to eventually hit bottom, at which point prices will dramatically increase?

My FIL's ISP is Wal-Mart connect.com. When he called to retrieve his password to transfer the account to his new computer, the CSR was in Bombay. The business got taken care of, and at the end of the call my FIL was told to "Have a quiet day!"...

 

[Spanky]

There are however items such as consumer electronics, computers that actually are lower in price and better in quality.

 

[Gone4Good]

There are however items such as consumer electronics, computers that actually are lower in price and better in quality.

CPI does attempt to adjust for changes in quality.

The attempt to adjust inflation for quality differences is often derided as manipulation, especially on these boards.

 

[cute fuzzy bunny]

Well, I can only speak for the one that suggested that faster computers make our lives better.

Given that way the whole focus of my working life, I can say with some authority that not only is the 'evidence' put forth in the white paper incorrect, there is considerable evidence that the opposite may be true.

One bad apple dont spoil the whole bunch, necessarily, but then again, maybe it does...

 

[ladelfina]

As quality decreases across the board for a range of products, lacking but still "good enough".. someone will step in to provide them at a higher quality.

In the grand scheme of things, though, I wonder how they account for increased availability of a larger range of items and prices, mostly because of Internet shopping. I can find the absolute lowest price on a washing machine, instead of accepting what the few dealers in my area decide to charge. I can go to Amazon and find virtually any book I want, used, so I save a lot there. Also things like Craigslist and eBay can lead to extreme bargains on many things.

I don't really worry about inflation w/r/t "things". I worry about it w/r/t food and energy which, below a certain level, we can't renounce. My gas bill for December: €590 ($705).

 

[Delawaredave]

It is also interesting to see the inflation impact differences between goods and services.

All the goods come from China - cheap labor - low inflation.
Most services can't be imported - outrageous medical costs to cover - high inflation

"Stuff" is cheap. Paying someone for a service ain't...

 

[Spanky]

In additional to increases of services, don't forget taxes, tuition, entertainment, utilities, gasoline ..

 

[macdaddy]

It's odd because we look around and see tremendous examples of both inflation and deflation.  To echo some other anecdotes on the thread - the other day I went to subway and tried to order my usual tuna fish 12 inch.  The fellow who made it put on so little tuna fish (three tiny scoops!) that I asked him to put some more on.  For the first time ever he said that it would be an extra 45 cents per scoop.  I was so offended that I walked out and went home and made my own sandwich.

On the other hand, the startup where I work has hired an indian firm to do 80% of our hard-core software development.  Five years ago, we would have put together a product manager and a team of US programmers to do this.  I don't know what the cost for that would have been - probably 200k/year at least.  The indian firm charges us about $4k/month for what is basically the same work.  The best part is that when the work is done they are out of the picture and we don't have to pay them, fire them, or fund benefits for them.  They simply disappear until another project is needed.  The reduced cost will be passed to our customers and allow better services in other areas.  So that is definitely deflation.

As far as health care (which I am familiar with), physicians in practice also see inflation and deflation tearing at each other.  They are being forced to pay more for office costs (real estate) and salaries (indirectly caused by real estate, because people need places to live).  Every year (by law) medicare is automatically cut 5% unless Congress passes a bill to prevent it, which they have for the past two years.  But in the last couple weeks Bush has come out publicly and said that the next two years the money will not be there to prevent it.  So medicare will be cut by 10% in 2 years.  I can't tell you how much this will hurt physicians who have high overhead.  In certain parts of the country, you may have a real hard time seeing certain specialists if you have medicare (whether it is means tested or not!).

 

[Spanky]

The reduced cost will be passed to our customers and allow better services in other areas.[/qoute]
Are you are about that? It is better for the bottomline - for sure.

So medicare will be cut by 10% in 2 years. I can't tell you how much this will hurt physicians who have high overhead.[/qoute]
Physicians will not be starving eeven though they are complaining that there is no money in medicine any more.

 

[macdaddy]

"Are you are about that? It is better for the bottomline - for sure."

Yes, at least I know we plan to pass that on to customers.  The key to "web 2.0" is that low overhead leads to very low cost for services (which have few barriers to entry) which is the only way to be profitable or remain profitable.  Or at least that's the philosophy.

"Physicians will not be starving eeven though they are complaining that there is no money in medicine any more."

You could say that even if Physician salaries were reduced to 80k/year that they "will not be starving".  And you are correct, they probably would still have enough money to put food in their mouths.  But there is no way that 80k/year adequately compensates them for their training and their work.  Consider that medical school is an additional 4 years after undergrad at anywhere from 20k to 50k a year (which many students are forced to take out in loans).  Many medical students leave with 50k-200k in debt.  Residency is not terrible at ~ 40k/year but they do work 80 hours a week.  The problem is that they delay the start of their lives until they are 30 or older.  They delay investments.  They delay the start of their families.  They delay the purchase of a home.  And then once in practice, every patient that they see opens them up to a lawsuit that could potentially wipe them out.  To be sure, there is at the moment still plenty of money in medicine.  But the same people who do it for 250k/year probably won't do it for 150k/year.  Ultimately this will affect you when you try to access medical services.  Your physician (or nurse practitioner) may very well be a foreign medical graduate from eastern europe on an H1B health care worker visa. 

National health care is trickier to implement in the US than people think because US medical schools are not federally subsidized.  Students pay (up to 50k/year at the private schools) for their education.  For several specialties (and for all family practice doctors) salaries can't come any lower than they are now.  Students simply wouldn't be able to pay back their loans in any reasonable time frame.  IF the US makes medical school free or dirt-cheap (as in other countries) and IF the US eliminates unshared malpractice liability (as in other countries) then salaries could come down (as they are already scheduled to) without as much of an effect.

My point was simply that there are deflationary forces that push medical salaries downward for most specialties.  Inflationary forces in the market push medical practice overhead up. Compensation for lawyers and accountants and most businesspeople seems to have risen as well.  So deflation here and inflation there and we all feel a little bit disoriented.

 

[Spanky]

$80K /year??

http://www.allied-physicians.com/salary_surveys/physician-salaries.htm

 

[macdaddy]

I used 80k/year as an example because that is what a new physician in practice in Canada (with national healthcare - where we seem to be headed) makes.  As I said, there is still plenty of money in medicine.  But as an exercise, take the salaries for what are probably the 3 most "important" specialties: Family Practice, Internal Medicine, and Pediatrics.  I can tell you that the "max" number is an anomaly and I don't know anyone in any field who makes close to that.  It could reflect someone who works 100 hours a week in Alaska. 

So the FP w/o OB who now makes $161,000 at the start of practice (and it declines to $135,000 after 3 years but I am not sure why so we will leave that out) will see his salary drop by 10% in 2 years to $145,300.  At the same time, the salary demands from his office staff will rise (because there is inflation everywhere else).  His inflation-adjusted salary will be an additional 8% lower (with 4% inflation/year).  The IM doc declines from $176,000 to $158,800.  The Pediatrician from $175,000 to $157,900.  Will the declines stop there?  Well that's up to the Federal Government.  How many fields out there hope and pray for an annual "freeze" in salary instead of an annual raise?

Deflationary pressure on salaries and inflationary pressure on overhead.  This is all an academic debate until you try to make an appointment with an IM doc - or your kids try to make an appointment with a pediatrician for your grandchildren - and you are told it is a 2 month wait (or that their patient panel is simply full and to try elsewhere).  After 2 months you see the doc for 5 - maybe 10 - minutes.  On subsequent follow-ups you see one of his nurses who assures you she is well qualified to take care of your complaints (do you feel confident?).  It will be tolerable if you live in the Midwest or the South where new docs will head for low COL.  But if you retire in the OC in 20 years I don't see how new docs will be able to afford to practice there at all.  I don't see how those areas will be provided with adequate medical services.  There was a time in this country when medical practice was a profession for the wealthy or for those with wealthy patrons, but nobody wants to see a return to that.

Obviously I am passionate about this topic but I try to tie it back to the point of the thread - inflation and deflation.  As all other expenses (house, insurance, food, energy, etc) become more expensive for physicians and the folks they employ, reimbursements are headed down, down, down.  Additionally what I have started to see and what I am sure some people here have read about is the rise of "boutique" or "concierge" medicine.  For an extra $3000/year you have 45 uninterrupted minutes once a month with a doctor who knows your name, your kids' names, your spouse's name, and hell even your dog's name - instead of 5 minutes with some guy whose main concern is whether he is wasting his time meeting with you when he could have put a nurse on it.  I think this mode of practice will only become more prevalent.   And that is an additional inflationary pressure for all of us who desire quality care.

 

[danm]

Good topic, especially like the postings from macdaddy.

Yes there is inflation and deflation everywhere. The two always fight each other, whoever is on top gets the headlines. At present it's true, there's wage deflation. Due to wage arbritrage from globalization we're all making less money (except CEO's, and probably workers in industries that are hard to outsource such as haircutters.)

People tend to focus on inflation however, because the 70's are still in recent living memory, and because we tend to think of the prices we pay on day to day goods as entitlements, and we don't count extra entitlements.

Think about toys. I don't see anybody complaining that toys are too cheap. But it's amazing! I remember when I was a kid when lead painted D&D action figures came out. God I wanted some! But they cost way too much. I imagined making my own little armies and having them battle it out. Recently in a toy shop with my son I saw a number of lines of such figures. This one out of Germany (made in China naturally) was cheap, cheap cheap! And the painting and diversity of them was really cool.

We've been enjoying disenflation for 25 years or so, and are in a period of low inflation, which may well tip over into a long period of low (good) deflation of oversupply. Certainly in my business I see that, there's oversupply everywhere. Around low inflation/low deflation the real cost of debt and wages goes up, so for businesses to stay in business, they have to trim costs in every way they can, without turning out customers. It's a tough balance.

So you'll see little cuts here and there, as companies try to 'fly under the consumer radar' and cut costs. Hey, I don't see anybody complaining that companies aren't passing on sky high energy costs on to them, eh?

 

[Andre1969]

You want a good example of deflation? Back on my 12th birthday, in 1982 I got an Intellivision video game from my Mom. She paid $229 for it, at Memco or some other discount store that's no longer around (at least in these parts) Back then new games for it were around $25-35. Your typical Intellivision game back then was around 6-8K in size, which was about as big as they got, until more advanced systems like the Atari 5200 and Coleco Vision came out.

Now, fast forward to today. You can get a Playstation 2 or X-box for under $200, and they can do a helluva lot more than my old Intellivision could! Heck, our Playstation can curse at you, flip you the finger, allow you to sleep with a prostitute and then kill her and take her money, carjack people, start gang riots, and more!! The best the Intellivision could do is give you a semi-realistic map of Occupied Europe in 1943 and let you go on bombing runs in enemy territory. Believe it or not, THAT actually caused an awful lot of public outcry over video game violence back then! Oh, and there was one game where if you screw up, you could see Earth get blown up. And a few D&D games where when you shot the monsters, they'd die and disappear in a cloud of smoke. But no cursing, even though the Intellivision could talk with the right games and an add-on synthesizer. I remember one of the dudes on your B-17 Bomber crew would get pissed when you accidentally bombed England!

On the subject of packaging food items into smaller sizes though, are they really doing that? I thought the trend these days was to supersize everything? for instance, don't most soft drink machines only sell the 20-oz bottle size? Been awhile since I've seen a 16-oz bottle. They're not really starting to put beer in 10-11 oz cans/bottles instead of the 12-oz, are they? Maybe I'll have to just start buying 40's! 8)

 

[TromboneAl]

As quality decreases across the board for a range of products, lacking but still "good enough".. someone will step in to provide them at a higher quality.

I'm not so sure about that.  Let's say I wanted to compete with Dell, and have knowledgeable, understandable educated tech support reps from Cleveland answer the phone on the second ring and give personalized service to every caller.  That would be good quality.  However, I wouldn't be able to afford selling computers at $349 each with that kind of support.  I could never hope to compete.

People complain about a lack of quality, but they can't resist the super low prices tags on poor-quality stuff.

 

[cute fuzzy bunny]

Yep, some of the fancy-dan beers now come in 10 and 11 oz bottles, that used to come in 12.

Look at candy bars. A candy bar was the size of your head when I was a kid. Now they're tiny.

Consumer reports loves covering the ever shrinking packages on their 'back page'.

While there is certainly 'deflationary' effects on some consumer electronics, I dont think those are lifes essentials. And while you can do so much more with a current PC or a video game, I'm not sure you can make a solid case as to how these products improve your life. Is the PS2 really a great trade for reading a book or playing outside?

I guess the death of a thousand cuts is more noticeable when you have a usage gap and can see the effect of multiple layers of change. I hadnt had an egg mcmuffin since I used to make them as a teenager. I got hungry early one morning on my way up to ski right after I ER'ed and stopped to pick one up. Seemed to me the whole thing was smaller. The english muffin is smaller than a regular size. Paper thin canadian bacon. An egg that would embarass a quail. Havent bought another one since.

But yeah, people will focus on price first and quality and service is just something to complain about.

 

[justin]

On the subject of packaging food items into smaller sizes though, are they really doing that? I thought the trend these days was to supersize everything? for instance, don't most soft drink machines only sell the 20-oz bottle size? Been awhile since I've seen a 16-oz bottle. They're not really starting to put beer in 10-11 oz cans/bottles instead of the 12-oz, are they? Maybe I'll have to just start buying 40's! 8)

I recently saw an 11 or 11.5 ounce soda can of minute maid orange juice. Sneaky bastards took some of my OJ. Prego pasta sauce is the same way. Used to be 28 oz, now it is mostly 26 oz. I've caught them red-handed before. The store brand size lagged the Prego brand size. When prego dropped from 28 to 26, the store brand was still at 28 oz for a while, until they copy-catted and dropped to 26 oz too. I see this all over. The 15 oz can of chef boyardees or 15 oz package of cookies. Supposedly it is for consumer convenience - marketing studies have supposedly shown that customers prefer the slightly smaller sizes. Yeah right. Sell 5-10% less product for the same price - that's the real reason. Then they can introduce the Super Size, that is slightly larger than the original size product (at a higher price of course). Kleenex tissues have done the same thing.

 

[Nords]

Is the PS2 really a great trade for reading a book or playing outside?

You can't build an equity portfolio from "playing outside". And Scholastic's stock performance has sucked over the last few years, even with Harry Potter...

 

[MileKing]

Looks like shredded cheese is headed this way too. Standard bag size has been 8 oz., but Sargento recently re-packaged most of its shredded cheeses to 6 oz. bags.....same price.

 

[HFWR]

Coffee...

Used to be 16oz cans, then 13, then 12, now 11 or 11.5...

 

[cute fuzzy bunny]

Oh yeah, I forgot that one! One pound bags of coffee beans are now 12oz!

This is worse than that aborted attempt to move us to the metric system!

 

[ladelfina]

Looks like shredded cheese is headed this way too. Standard bag size has been 8 oz., but Sargento recently re-packaged most of its shredded cheeses to 6 oz. bags.....same price.

Hey, the way to FIRE is to shred your own cheese! The shredded kind usually costs way more (and has a tendency to get moldy quicker ).

 

[cute fuzzy bunny]

I can get two humongous bags of preshredded cheese at the warehouse club for next to nothing!

I like to save where I can, but when i'm already making and eating my own food at home instead of eating out I dont mind paying an extra buck or two to cut some prep corners.

 

[ladelfina]

What do you do with two humungous bags, freeze it? Mine would get moldy inside of a week - 10 days.  oooo I am pining for some Cracker Barrel cheddar.

A candy bar was the size of your head when I was a kid.

Begs the question of how big your head is. 

On the subject of consumption, I notice that in the supermarket we are the only people who load up our cart. I don't know if it's cultural or economic, but I get the sense that food consumption here is more limited. That, or they go to the supermarket several times a week.

As far as food companies are concerned, they have tighter margins than other businesses. And while the consumption of gas, clothes, and video games is elastic, food consumption has natural limits, so they have to make up the difference any way they can in order to 'grow'.

Kleenex tissues have done the same thing.

Justin, quit yer whining about Kleenex..  When I go to the States I put 2-3 Giant Kleenex boxes in my luggage. You know what Kleenex costs here? €2.79 ($3.35) for two boxes of 54 Kleenexes each!! Fifty-four.. don't ask me why it's fifty-four  Anyway, 3x the US price...

marketing studies have supposedly shown that customers prefer the slightly smaller sizes.

I wouldn't be surprised that this is actually true. There are a lot more smaller households than in the past. More singles, more oldsters that don't eat as much..  In the past few decades the "small" sizes of coffee and other soft drinks has grown to match the old "large". I always get the smallest drink available and am astounded at how much they give you. I would buy a "small" at half the volume and 75% of the price, sure, because the rest I don't need.

I wouldn't be able to afford selling computers at $349 each with that kind of support

Trombone Al, what I meant was, there will always be some market for better goods/services at a somewhat higher price. Everyone does not always compete for the rock bottom of the market.