On my way to the grocery store, I was mentally preparing myself for the sticker shock. I got my diapers and hopefully it’s something else for you. For me, diapers is really where I notice inflation the most.
One of the interesting things about this particular period of inflation is that it is a worldwide phenomenon. My question is about inflation: what is the real cause? Is it just COVID or do we have others to blame?
Diapers in the US, food in Ghana, and home prices in India - what caused all this inflation? Is there something we can do about it?
If you watch cable news in the US, you will see one explanation for inflation that gets a lot of attention: “Too much money chasing too few goods.” For example, say I have a car dealership. During the pandemic, factories are periodically shutting down and I’m not able to keep as many cars on my lot. My inventory is low, but at the same time, I have customers willing to spend money on my cars. My inventory starts to dwindle, and now there is more customers than there are cars. So I can just increase the price.
Economists like Larry Summers have been sounding the alarm bell about this kind of inflation from the beginning. He is talking about those pandemic relief checks. Before we can figure out if Larry Summers is right, we need to take a closer look at exactly how inflation is measured in the first place.
Once a month, the US Bureau of Labor Statistics puts together what it calls a market basket. They look at the prices for different goods and services like housing, electricity, apparel, prescription drugs, bakery products, and dairy. They look at the price we’re paying this month and then compare it to the price for the same good or service last month or last year. Then they calculate a single percentage that captures all of that change and that’s the Consumer Price Index, or CPI.
And it’s true the consumer price index has been rising steadily for the past couple of years. But now let’s take a closer look at some of the specific goods and services that make up the CPI. Some things are way more expensive than this time last year like fuel oil, airline fares, gas, baked goods, and dairy products. But there is some stuff that’s held fairly steady. In a normal, healthy economy the Federal Reserve expects for inflation to be about 2% a year. And for stuff like clothing, prescription drugs, and education prices are only slightly above that 2% mark. For used cars and trucks, gasoline, and communication prices are actually lower than this time last year.
It seems a bit more complicated than simply: People have too much money. If that were the only problem, wouldn’t everything be more expensive?
Unfortunately for me, the Bureau of Labor Statistics doesn’t actually track the price of diapers as part of the CPI. But I did find a private research firm, Nielsen IQ, that does. So, Nielsen looks at something called the unit price. Basically, they take the box of diapers divide it by how many diapers are in the box and that gives you the unit price. They get a bunch of different brands and then come up with this average.
So in 2019, the average unit price for diapers was 16.1 cents. If prices had gone up at that expected 2%, annual inflation rate, January of 2023 would have seen me paying 17.4 cents per diaper. But of course, that’s not what the last few years have looked like. If the price of diapers had increased at the same rate as the CPI, I would be paying 19 cents per diaper in January of 2023. But the cost of diapers is still going up.
No, no, no. I am currently paying 21 cents per diaper, which is an increase of over 30%. So why are the prices of diapers rising faster than the prices of other goods? You can think of the costs of a business in two ways: wages for workers, investments in capital and machinery, and the cost of production. The difference between those two costs is called a markup.
It is difficult to report on inflation because reporters and consumers don’t know how much it costs companies to pay their workers or import materials. However, from 2019 to 2023, the average hourly wage for someone working in manufacturing rose by about 17%, which is faster than the expected 2% annual inflation. The cost of materials, such as wood pulp and plastic products, has also risen significantly over the past five years.
Big corporations have been increasing prices beyond what their production costs would justify. CEOs of Hostess Brands, Tyson Foods, and VISA have all claimed that the price increases have more than offset their higher costs. All three of these corporations have experienced record profits over the past 3 years, but they have paid that money out to their shareholders and raised prices for the rest of us.
In order to help bring prices down, the Federal Reserve has raised interest rates 8 times, making it more expensive for companies to borrow money and limiting their ability to invest and hire. If the Fed continues to raise rates, inflation may go down, but unemployment could go up. In the last month of 2022, prices had started to come down in some key areas, but the cost of diapers is still going up. Prices for gasoline and fuel oil have decreased drastically over the past 12 months, likely due to President Biden releasing millions of barrels of oil from the US emergency stockpile, thus increasing global supply and driving down the price. This is not the first time that the US government has taken action to lower prices in an area of the economy; in 1939, President Franklin Roosevelt asked Congress for nearly $900 million to help the airline industry quadruple their output.
Rakeen’s insight into the diaper industry got me thinking about a third way that prices could be lowered. It turns out that between 70 and 80% of all diapers produced in the US are made by two companies: Procter & Gamble and Kimberly-Clark. This means that while parents appear to have many choices in the diaper aisle, they actually don’t. Policymakers have allowed rampant deregulation which has enabled these companies to have so much power that they can raise prices without consequence. Rather than throwing workers under the bus in order to bring down prices, policymakers should dust off the corporate power dial and adjust it accordingly.