29 July 2009

Deflation strikes Doritos

The deflationary forces keep sneaking up on us. Here is an example of how some super-market items are finally starting to see deflation. It’s telling, however, that prices for these items haven’t changed. Instead, producers are simply offering more goods for the same amount of money.

Your eyes are not deceiving you in the grocery store. Yes, your bag of Doritos just got
bigger. No, the price didn't change

Last year, food packages
shrank as food-makers, dealing with record high ingredient costs, struggled to
maintain their profits. But the weakened economy has caused a slump in demand
for ingredients such as corn and oil, pushing those prices back down. With lower
ingredient costs -- and higher consumer demand for more value -- some brands
such as Frito-Lay are shifting back to bigger packages, and doing it without
raising prices.

This fits a pattern I’ve been seeing lately. Deflation is indeed rearing its, head, but it doesn’t always show up in the list prices. For example, many private schools are offering far more generous financial aid packages (to a much greater portion of students) rather than reducing their official tuition rates. We see a similar phenomenon in other areas where list prices remain high, but increasing numbers of add-ons are offered at no extra cost. A five year warranty? No problem it’s built into the price. You can get almost anything upgraded these days without paying a “premium” price.

At some point overt deflation will break out in even these laggard areas of the economy. House builders tried to stave off price reductions for years by offering ever more expensive inducements (including outright cash kick-backs), but eventually there was no alternative but to just drop the prices. Everyone else is just catching up.

1 comment:

  1. Here's another example:

    However these are isolated, anecdotal examples. It's too soon to tell if they're indicative of a broader deflation trend.