Seeing Inflation with Your Own Eyes

While 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 a 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 (HNZ) 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.

Comments

[Davewmart:]

The link to the pdf is not working.
I am currently checking the info on the baked beans! ;-)

Jul 29 08:34 AM

[Prudent Inv...:]

Sorry for the bad link. Yoiu can download the PDF here:
www.4shared.com/file/1...

Jul 29 08:53 AM

[Davewmart:]

Thanks for the link.
I can't see the Euro surviving either, but then again the World economic system is like being inside a house in an earthquake - you may not know which timber is going to fall first, but in the end the whole house will collapse.
As soon as the shaking gets a bit worse though, and it will, that should be the end of the Euro, except maybe for a central core of countries centred on Germany and France.

Jul 29 09:30 AM

[notsosmart:]

the dumb-dumbs here & in europe,on the whole,dont even look @ the shrinkage of content.you can win to a degree-buy the stock of the good food co.s.i laugh@ the 16oz coffee cans with 11.5oz. of coffee.they could cut the size of the can in 1/2 & save a bundle on metal & print.as far as the euro goes-the silly nationalism of each country will sink it.im surprised its lasted this long.

Jul 29 10:51 AM

[Celcius:]

I read the Black Swan report and it is very stilted. It is from the outside looking in - a US perspective. The same internal EU talking points that are emphasized in the report can equally apply to US states and their debt. Look at California's debt... The US states have as much chance of breaking up as the EU does. But most important of all is that EU trade with the US is only equivalent to 25% of all inter EU trade. So, if the EU rebalances its trade with the US, the odds are for greater inter EU trade. And, if an EU country did break off from the EMU the economic cost would be catastrophic. Their local currency would be greatly devalued vs. the EURO resulting in a significant reduction in purchasing power. IMO any country that left the EMU would have a very high probability of internal political revolution which could potentially cause an inter EU military invasion to stabilize the country.

Jul 29 11:59 PM