With fall in full swing and snow gracing the mountaintops, I turn to a classic dish for some winter comfort: Campbell’s Tomato Soup. First introduced in 1895, the can would bear its familiar red and white label in 1898 after an executive attended Cornell-Penn’s annual football game and “was impressed with Cornell’s new red and white uniforms,” according to the report. Campbell’s website.
Stubbornly consistent, very little has changed in the soup over the century it’s been available. As such, it is an unusual, yet informative, way of measuring a current problem: inflation.
For the first 76 years of its existence, until the end of 1973, consumers paid between 7 and 12 cents per can thanks to government food price controls. As of January 2020, the average advertised selling price was 85 cents per can, resulting in an approximate inflation rate of about 4.3% per year for 46 years (since controls were lifted). Today, the average price is $1.18 per can. . Do the math, and that means the median price has risen at a rate of 17.8% in just the past two years.
This shouldn’t surprise anyone. Prices have been rising across the board. Inflation has become a household word and the bogeyman everyone is trying to stop. Who or what is to blame? It depends on your news source: Democrats, Republicans, OPEC, COVID, Federal Reserve (Fed), vendors, consumers, the person who owns your local bakery… you name it. As if these individual entities have a lever in their office that directly controls the prices of goods and services. I find the image of the baker on the corner laughing maniacally as he raises the price of the croissants, thinking, “That’ll get them!” both funny and completely inaccurate.
The reality is that nobody wants to raise prices, especially the companies that serve you. The higher the price of croissants, the fewer they sell for along with a cup of morning coffee. But the cost of flour, sugar, energy for the oven, and labor has gone up, so what is the baker to do? Their sole purpose as a business is to provide value to their customers and to generate profit. When costs go up, prices go up. It’s a simple balancing act. Can anyone blame a business owner for raising prices due to rising costs?
However, consumer spending remains high. Anyone who has traveled lately is familiar with the long lines at DIA or the difficulty in finding some of the goods we all still want. Personally, I assume that most of the things I order will take at least two weeks longer than expected. With consumers adjusting to higher prices, I think it’s unlikely we’ll see significantly lower prices anytime soon. Inflation is “sticky.”
Last week’s consumer price index reading was a welcome change to what had been steady month-over-month and year-over-year increases. The figure for September was +8.2%, which means that for the same basket of goods and services, prices increased 8.2% in the last year. However, this month saw that number “drop” to +7.7%, the lowest annual increase since January, according to CNBC. Some believe this is a sign that inflation may have peaked and could trend towards more reasonable levels in the long run. They think this could give the Fed enough data to slow the rate at which interest rates have been rising. I hope this is the case, but “hope” is not a financial strategy.
Even if inflation has peaked, goods and services are still 7.7% higher than a year ago, at which point they were already much higher than the year before. If businesses and consumers continue to adapt to higher prices, all we will have done is hit a new price plateau. By raising the cost of money (interest rates), the Federal Reserve has apparently applied enough of the “brake” to slow us down momentarily. Unfortunately, continuing to increase the price of money puts us at increasing risk of a longer and deeper recession. I don’t think that method of fighting inflation works.
For many years, consumers got drunk on the idea of cheap money. Money is garbage was a popular saying. While the Federal Reserve kept interest rates near 0% for far too long, swinging the pendulum the other way is unlikely to fix the problem.
Instead, I think we need to increase our productivity to bring prices down. Readers are also familiar with our apple inflation analogy: if the economy is 10 apples and there are $10 in the economy, the price per apple is $1. When the government printed and pumped 40% more dollars into the economy over the last two years, those $10 increased the money supply to $14, but the economy kept producing the same 10 apples. The price per apple is now $1.40. Now, that’s inflation! Rising interest rates or the cost of money will not cause the price of an apple to fall, but growing more apples will. If we grow 14 apples and have $14 in the economy, the price per apple will drop to $1. The solution is to increase productivity, produce more goods and services, deregulate, reduce friction between companies and people, and encourage growth. That is the solution.
The definition of entrepreneurship is taking some raw material or product and creatively adapting it to a new level of higher value. There are so many opportunities in our economy. Innovators wake up every day thinking about how to make things faster, easier, better, and cheaper to increase value for consumers and businesses. Our way out of inflation is not by making it more difficult or expensive to do business, but by breaking down the barriers that make starting and growing a business so difficult.
We need to grow to get out of inflation.
Steve Booren is the founder of Prosperion Financial Advisors in Greenwood Village. He is the author of “Smart Investing: Your Guide to a Growing Retirement Income.” Forbes named him the 2021 State’s Best Wealth Advisor and 2021 Barron’s Senior Advisor by State. This column is not intended to provide specific investment advice or recommendations.