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Puget Sound Indexer

Puget Sound Indexer

Doing the Numbers

Price Signals: Go Vegan And Fill Your Tank

June 16, 2020 by Michael Luis 1 Comment

The coronavirus shutdown is playing havoc with just about every market.

Take the now-famous toilet paper run. There is plenty of toilet paper out there. The trouble is, the commercial product is quite different from the home product, and demand suddenly shifted away from commercial toilet paper (fewer people using restrooms in commercial buildings) and toward home toilet paper (everyone sheltering). Add some hoarding, and the normally efficient supply system breaks down.

The same thing happened in meat packing: the expensive cuts that normally to go restaurants are backing up in freezers, while pork chops gets more expensive. Now, add to this confusion the shutdown of meat packing and other food processing plants due to outbreaks of COVID 19, and the normally smooth food distribution system gets turned inside out. This will be reflected in prices, with beef prices up 15 percent in the past three months.

On the other end, an already troubled oil industry saw a sudden plummeting of demand for motor fuel. According to the U.S. Energy Information Administration, national demand for gasoline normally fluctuates between 8.5 and 9.5 million barrels per day. In mid-March, when the shutdown began, demand was running almost 9.7 million barrels per day, and within three weeks demand had dropped to 5.1 million barrels per day. Average national gasoline prices had fallen to $2.25 per gallon by mid-March due to unusual market conditions, and then fell to $1.77 by late April.

The U.S. Bureau of Labor Statistics released its most recent national price data this week, and it shows movements all across the consumer basket of goods and services. Figure 1 shows price changes for common categories between February and May (these are actual changes, not annual rates)

Most of these price shifts seem intuitive, although there does not seem any obvious reason for the price of apparel to fall so dramatically. Car insurance rates dropped due to the fact that insurance companies were not paying out as many claims: less driving means fewer collisions. Airline fares plummeted, as did the price of gasoline and diesel fuel.

Figure 2 shows more detail on food categories.

The price of food products bought in grocery stores increased by 4 percent in three months. This was led by increases in meat prices, but increases were consistent across the board. The food away from home category shows more limited price increases for what should be obvious reasons.

The “all items” line, which shows a slight price drop in Figure 1, has been disputed. This average price increase is the figure we normally use for general inflation and is the basis for the consumer price index. It is derived from a weighting of all goods in the consumer basket, but because that basket has changed dramatically in the past few months, the overall figure is not thought to be reliable. For example, the higher cost of food at home should be weighted more heavily, and the cost of fuel weighted more lightly.

Looking ahead

Prices should moderate as supply systems adjust. The larger inflation concern stems from the massive increase in the money supply due to federal interventions in business and household finances. Since the economic downturn is heavily supply-led, getting production back up quickly will be crucial to ensuring that prices do not rise too quickly as consumers head back out to the marketplace to spend all those dollars that have been rolling in.

An argument will be make that an above-average level of inflation will be a good thing in that it will help incentivize consumption (buy now before the price goes up!). Inflation will also reduce the burden of paying off all the debt the federal government has taken on by making future dollars more abundant. But such an approach to reducing federal debt is, to say the least, not universally supported.

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  1. Maureen Stivers says

    June 16, 2020 at 12:35 pm

    Here’s a theory of why apparel prices have dropped based solely on my own habits and inclinations. Firstly, I like to look nice when I go out. I don’t care so much what I wear when I’m staying at home. Over the years I have consciously and unconsciously developed separate wardrobes for at home and a leaving the house. To state the obvious, I have had far less need of the “outside the house” wardrobe. Secondly, the time between March and now represents a change of seasons with clothing going from winter woolens (OK, fleece and denim) to cotton shifts. (OK, Capri pants and T-shirts.) It is my favorite time of year to buy a new piece or two of clothing. Those lighter, brighter additions to reflect and celebrate the warmer, lighter months. Since I so rarely go anywhere these days with a need to look nice, I’m content to pull out something from last year (and beyond) and be good with it, On both counts mentioned above, I have felt no need or frankly any desire to buy anything new. This is purely a woman’s perspective as men’s clothing changes less with the seasons than that of women’s. And, I believe, women are more likely than men to have two distinct wardrobes for home and out. To conclude, my theory is simple supply and demand. The clothes horses will continue to buy new clothing in any way they can. The rest of us have had less need. And have bought less. All creating a glut of product and lower prices.

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