For anyone who has recently shopped for groceries, you may have noticed meaningful price increases. If you haven’t, perhaps the prices themselves have not jumped, but the packaging has shrunk:
With a tight job market keeping wages relatively flat, food manufacturers are reluctant to raise prices on cost-conscious consumers. However, their input costs have risen enough where those firms need to generate extra revenue to stay profitable.
Consequently, the quantity of food in a standard package can decline while the price remains the same. At first glance, a 14-ounce package may not seem all that different from a 16-ounce one. Buying a 14-ounce can of fruit for the same price you used to pay for a 16-ounce can seem more palatable than having the price increase by 10% one day.
In actuality, a 10% price increase is better for the consumer than the 16 à 14 ounce reduction.
You need to consider unit prices, where measurement is in the denominator. If the can of fruit remains at $2.00, it used to cost 12.5 cents per ounce [$2.00 / 16 oz]. Now the fruit costs 14.3 cents per ounce [$2.00 / 14 oz]. This 1.8 cent per ounce price increase equates to a 14.3% jump in fruit prices.
Most Americans will be lucky to receive a 2-3% increase in wages and benefits this year, so meaningful food inflation will reduce their discretionary income which supports other economic sectors. Reductions in food quantity are especially insidious, as many consumers don’t internalize just how much more they are paying for items.
This phenomenon exemplifies the inflation you and I face every day, much of which can be attributed to the Federal Reserve’s “easy money” policies discussed in this previous post.
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