See Inflation With Your Own Eyes

Wednesday, July 29, 2009



Preparing my favorite cooked breakfast of bacon & eggs with fried tomatoes and baked beans on toast I stumbled upon another sign of food inflation. While this depicted can of baked beans costs an unchanged 89 Euro cents in my local supermarket I get less product for the same price.
Opening the 10 cm high can one discovers that it is only filled with 75% beans. Heinz has become generous with its tomato sauce which fills the top 2.8cm of the can and I can remember very clearly there used to be more beans in the can 2 years ago. Under the assumption that Heinz used to fill the cans with 90% beans I arrive at an earlier kilo price of €2.68.
At the lower fill rate of 75% one has now to pay €3.21 to get a kilo of this Heinz classic.
This is a 20% price hike within 2 years or some 9.8% p.a. Being highly skeptical about official consumer price indices I prefer such on-the-ground research, this time in the comfort of my own kitchen. Like stamps there cannot be any hedonic changes applied to baked beans. It's the same product for several decades. Although EU laws require food distributors to display a kilo price consumers are being tricked this way in a multitude of food items. My favorite cookie bar still costs the same, but on opening the wrapping I find a vacuum of 2 centimeters in a 6 cm long wrapper. This is one more sign that companies cut corners in order to keep the price tags per unit unchanged.
It is ironic that consumer surveys on prices always result in a much higher rate of price inflation than the respective national statistics office's calculations. Prices have roughly doubled in Austria since the introduction of the Euro. Former central bank governor Klaus Liebscher's statements that consumers "feel higher inflation" made him always appear a bit helpless when defending the non-existent strength of the Euro.

The Euro Is Doomed to Fail as All Monetary Unions Did in the Past
If you are in the mood to read more about the doomed Euro currency, download this PDF from Black Swan Capital, titled "Preparing for a Breakup in the European Monetary Union." Short reminder: All currency unions in history ended with a complete economic mess due to wide differences in the terms of trade that varied regionally. From a historic perspective the Euro will share the same fate. While I certainly oppose Milton Friedman's supply side theories Black Swan noted this smart statement made before the introduction of the Euro:
It seems to me that Europe, especially with the addition of more countries, is becoming ever more susceptible to any asymmetric shock. Sooner or later, when the global economy hits a real bump, Europe’s internal contradictions will tear it apart.
Parsing Black Swans research note I am reminded about the sunny summer Maastricht convergence criteria. They mandate the following.
  1. Inflation rate: No more than 1.5 percentage points higher than the average of the three best performing (lowest inflation) member states of the EU.
  2. The annual government deficit to gross domestic product (GDP) must not exceed 3%.
  3. The ratio of gross government debt to GDP must not exceed 60%.
  4. Nominal long-term interest rate must not be more than two percentage points higher than in the three lowest inflation member states.
These criteria were invented 10 years ago when it was unimaginable for the big majority of "experts" that Europe would ever face again strong economic headwinds as we witness them now. Thanks to these optimists there are no official strategies as how to unwind from the Euro currency union without major collateral damage.
I faintly remember that the idiotic Maastricht criteria also include punishment rules if a country diverges too far. Seeing only negative convergences these days like rapidly rising unemployment, ballooning government debts and tricks on official inflation figures I arrive at the sad conclusion that applying fines on weak Euro members can be compared to a man who stumbled and falls and the arriving paramedics jump on his back.
Brussels, we have a problem and you are cooking up the wrong medicine. Celebrating black masses at the grave of John Maynard Keynes are certainly not the solution. You cannot fight monetary inflation by printing ever more Euros for a sagging economy.

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