Sunday, December 5, 2021

Refrigerator Inflation, Frantic Freckles and Laid-Back Lucy

Bureau of Labor Statistics

Bureau of Labor Statistics

Ask The CFP® Practitioner
Darcie Guerin

You’ve got bad eating habits if you use a grocery cart in 7-Eleven.” – Dennis Miller, American Comedian and Actor


Question: My grocery bill keeps going up even though I purchase the same items each week. According to the media, inflation is low or non-existent. How can this be true?

Answer: Inflation is measured by the Core Consumer Price Index (CPI) to indicate price trends. The reason your food shopping experience doesn’t match what you see as reported inflation is that necessities like food and energy aren’t included in the calculation. This is why inflation can be reported as low or non-existent while your grocery bill goes up.

Food and energy aren’t included in Core CPI because many economists believe that those prices are too volatile and that including them could create havoc with long-term consumer trend forecasting. The intention is to filter out fluctuations created short-term by food and energy price movements.

Economists continue to debate whether or not it’s appropriate to exclude food and energy prices from core inflation reporting. Technology and distribution improvements have reduced the price volatility of these items over time.

According to the Bureau of Labor and Statistics (BLS), the Core CPI components, such as housing, transportation, utilities, clothing and medical expenses, tend to be steadier than food and energy over the long-term (see graph).

An analogy may help explain this relationship. Here goes. We have two cocker spaniels, Lucy, our laid-back lady, and her younger brother, the energetic and frenetic Freckles. Lucy represents the steady red line on the Bureau of Labor Statistics CPI graph denoting the more stable and long-term components of inflation like housing, transportation and utilities. In contrast, frantic Freckles signifies the blue line, which includes the more erratic energy and food expenses.

During our walks, Freckle’s journey is typically more unpredictable and volatile than Lucy’s. He dashes hither and yon, burning up energy, while Lucy maintains a steady and even pace. Both dogs walk the same trend line over time and ultimately arrive at the same destination, much like prices for all consumer items, including food and energy over time.

To understand recent food inflation, it helps to recall that inflation is defined as too many dollars chasing too few goods. Over the past 10 years, our monetary base (dollars) expanded an astonishing 391 percent while Gross Domestic Production (GDP) only grew 42.5 percent during this same 10-year period. As a rule of thumb, a country’s currency base should increase at the same rate at which its GDP grows to avoid inflation; clearly, this is not the case.

So besides paying for higher priced food,

M2 US Monetary Base Federal Reserve Bank of St. Louis

M2 US Monetary Base Federal Reserve Bank of St. Louis

where is all the “extra” money going? Much of it goes to pay down debt. Beyond that, some corporations and consumers are hoarding cash. Money sitting on the sidelines doesn’t contribute to real economic growth and can’t push prices higher or drive wages upward. This is why Core CPI inflation as reported is relatively low; liquidity is trapped.

In December 2003, the cost for these items — a loaf of white bread, one pound of ground chuck, one pound of fresh chicken, a dozen eggs, one gallon of milk, one pound of red delicious apples and an average cup of coffee — totaled $12.97. By December 2013, the same basket of goods increased to $18.31, up a whopping 41.17 percent. Food is a necessity we cannot forego, making it easier for producers to pass along price increases.

Over the long run, inflation is caused by too much growth in the money supply. Monetary inflation is harmful because it blurs price signals that help market systems work efficiently. By filtering out food and energy prices, we lose valuable information about inflation.

Our financial system effectively came to a halt during the fall of 2008. To provide liquidity, confidence and to keep money in motion, the troubled-asset recovery program (TARP) and QE (quantitative easing) as a monetary stimulus program were implemented. These techniques, along with low interest rates, are used to support employment and fuel the overall economy in essence acting as foam on a runway, softening the landing of a crashing plane. In essence, we’re still dealing with the mess.

Look inside your refrigerator for the evidence of inflation. Even though inflation usually rises and falls depending on economic factors, such as money supply, this is little comfort to retirees or those on fixed incomes. This is why it’s important to plan for both short- and long-term price household expense increases and consider the economics of spending. Stay focused and invest accordingly.

This information is general in nature, it is not a complete statement of all information necessary for making an investment decision, and is not a recommendation or solicitation to buy or sell any particular investment. There is no guarantee any particular investment strategy will be successful. Opinions expressed herein are those of the author and subject to change at any time.


This article provided by Darcie Guerin, CFP®, Associate Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached at 239-389-1041, or Please contact Darcie with any questions you would like to have answered in this column.

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