Are Essential Goods Cheaper? (Thesis #5)
- C&C
- Oct 12, 2020
- 19 min read
Updated: Oct 19, 2020
(Continuation of Thesis #4)
Food, water and shelter make up the bare necessities of life. Experts estimate that under average outdoor conditions a human can go 100 hours without water and a few weeks without food. In the case of severe weather, shelter is key to survival. An essential good is one that every human needs and can acquire outside of civilization.
By this definition, laptops, smart phones, cars and even medical treatment are not essential. It is not that these items (and service) are not important or even critical to modern life. It is instead that they do not qualify as essential, because they are products of civilization. Indeed, these items may very well define civilization, but they do not define what is essential to live on this planet.
In Thesis #4, I posited that the last 40 years were defined by stable prices among essential goods. You will recall that I tracked the prices of bread and wheat from 1980 to 2019. I found that nominal prices rose, so costs appeared to rise, but the Consumer Price Index (CPI) (inflation) adjusted prices showed that costs really fell with respect to the buying power of the 2019 dollar. I hypothesized that the narrative suggesting that the cost of living rose, is wrong.
Notice how the price of wheat undulated from $7 to $4 (43%), to $8 (100%) and back down to $4 (100%). While the price of wheat was volatile from 1985 to 2018, the price of bread, the benefactor of wheat prices, presumably a tandem to its undulations, went from $1.3 to $1.6 (23%) and back down to $1.3 (18%). Hence, the problem is presented.
The waves in the price of wheat were not reflected in the price of bread. In fact, the correlation between wheat and bread prices was a meagre .38 (Note: I initially had the correlation at .44, but that was wrong). The curve of bread prices is smooth and the curve of wheat prices is choppy. What shields the presumably interlinked price of bread from the volatile price of wheat?
In Thesis #4, I conjectured that federal subsidies shield wheat prices from larger price volatility. If this is true, then subsidies have an even more smoothing effect upon the price of bread. Here, we limit our study to the comparison of wheat, white flour and bread prices from 1980/1985 to 2019 to those of earlier periods: 1913 to 1947 and 1948 to 1980/1985.
It is an axiom of good governance that cheap and stable prices of essential goods placate the citizenry. It is not so much that citizens are excited by stable or cheap prices for essential goods, a condition long-underappreciated, but that citizens are very excited by expensive or unstable prices for essential goods. For this reason, the long trajectory of reduced costs and stable prices is a trend that has gone long-underappreciated.
Extreme price volatility and decreased buying power is a sure recipe for civil unrest. As long as prices are stable, however, the citizenry may focus less on nude essentials like food, water and shelter, and focus more on clothed causes salable on the advocacy marketplace. In principle, once the grand majority of society is secure from the essential plight of thirst, hunger and nature, civilization is cast to sail an odyssey to whatever shore it so chooses (for example, to a more just and equal society). [1]
The buying power of the 2019 dollar (illustrated through the CPI) with respect to bread and wheat is stronger, not weaker, than in the past. That is, among all of the factors which decrease the relative value of a largely fiat currency like the U.S. dollar, none have decreased, in effect, the buying power of the dollar. In fact, the dollar is experiencing a period of exceptional stability settling at an inflation rate of 3% a year from 1985 to 2019. During this period, the cost of wheat and white flour decreases and the cost of bread remains stable.
Notice in figure 3 how the inflation rate settled down from 1981 onward. In contrast, note the exceedingly high levels of inflation from 1915 to 1919 (high of 17%), 1939 to 1950 (high of 15%) and 1971 to 1981 (high of 14%). Only the period from 1951 to 1968 (17 years) comes close to showing exceptional stability similar to the period from 1981 to 2019 (38 years).
Figure 3 shows the annual rate of change of the CPI figure, i.e. the inflation rate, and the annual rate of change in the relative buying power of the dollar in the year-over-year period in question. Notice how the annual rate of change of the buying power of the dollar (again, in terms of the 2019 dollar) mirrors the inflation rate as its opposite. Why?
Easy, a higher inflation rate means a relatively lower buying power. In the case of our calculations, we base all of our adjustments in terms of the 2019 dollar. When the inflation rate rises, then the relative buying power of the dollar falls respective of the 2019 dollar. When the inflation rate falls, then the relative buying power of the dollar rises respective of the 2019 dollar. Any figure which runs further from 1:1, i.e. the base year of 2019, is a case of decreased buying power relative to the 2019 dollar.
Paradoxically, fewer dollars were required to buy an item in the past. But with increased circulation, increased supply (stock) and entrenched economic expectations (guidance based on the experience of the recent past that is by no means law), the quantity of the dollar, which maintains enough inherent value and fiat value (speculative value), outweighs and outpaces the dilution in the value of the dollar, nominally.
One way to think of it is how a joint-stock company ("stock") dilutes its shares in order to finance its ventures, i.e. sells shares in addition to the shares which are outstanding. Naturally, when the shares are diluted, the value of the shares of the stock on the exchange decrease. There are now more shares of the stock and so each share is worth less than it was before, because each share represents a lesser part of the stock than it had before. If the stock does well and produces profits in excess of what the prior balance sheet achieved, then despite dilution, the value of the shares can reach heights well in excess of the pre-diluted exchanged price. Thus, with more shares representing smaller portions of the overall stock, the value of each share rises nevertheless.
Now, if the stock is already doing very well and it dilutes its shares, then the price of each share may decrease in value, slightly- depending on how much it is diluted. But with success and the expectation of continued success, the exchanged value of the share will flatten and stabilize in the face of what would have been a rise in the price per share had there been no dilution. If a stock continues to dilute and the produce of their ventures continue to be worth slightly more than the inherent decrease in the value of the shares, then the value of the shares, although inherently worth less as a portion of the whole, are more plentiful, priced about same, but are part of a larger revenue stream, and perhaps profit margin, that may not have been achievable had the shares never been diluted and the ventures expanded.
The supply of shares increases, thus alleviating the demand for shares, which depresses the price of the shares on the exchange. If all goes well, the return on investment, despite dilution, outpaces the loss of inherent value implied in its reduced share of the stock. This is one way to understand inflation and so-called quantitative easing. It only works if the American economy continues to grow. [2]
Figure 4 shows the multiplier that is applied to every nominal price from 1913 to 2019, effectively adjusting the nominal price for inflation. This gives us an appreciation for the buying power of the dollar and the cost of goods over time, rather than only assess the raw, or nominal, price of goods over time. This is helpful because it allows us to conceptualize the cost of goods in our own terms and compare if, when adjusted, we pay more or less, respective of the 2019 dollar for items as basic as essential goods: food, water and shelter. [3][4]
Ok, so now that we understand why CPI adjustments are made and why they are helpful, let us now turn our attention back the cost of bread, wheat and white flour. Thesis #4 was limited to the data on bread and wheat over the last 40 years. While we gained an appreciation for our recent past, we had no other period to compare it to. Is it a remarkably stable period or not?
This article, Thesis #5, is concerned with Department of Agriculture (DoA) and the Bureau of Labor Statistics (BLS) data of the price of bread, wheat and white flour from 1913 to 2018/19. For the price of wheat we use the aggregate of all wheat sales for all varieties: Hard Red Winter, Hard White Wheat, Soft Red Winter, etc. The price of bread is limited to white bread, because the BLS did not collect wheat bread prices for the majority of the period of study. White flour is the additional item of study, because it is a byproduct of wheat and is a constituent part of bread. White flour data supports the claim that the constituent parts of bread are more volatile than bread itself. White flour data also supports the finding that the constituent parts of bread costs less over time.
*Note, the data for the price of wheat is limited to 2018. Also, data for the prices of bread and white flour were unavailable for the year 1979.*
Observe Figure 5. Notice that the price of bread increased nominally by $1.24 from 1913 to 2019, representing an increase of 2217%. At the height of the Great Recession the price was even higher sitting at $1.45 or $1.39 higher than in 1913, representing an increase of 2480%. Taken alone, these figures show that the price of bread increased steadily over time. Simple enough. However, if the price of bread is CPI adjusted, then the curve no longer takes the shape of a hockey stick. Instead the curve appears more like a hose unraveled to the flower bed with a few kinks along the way.
When the price of bread is CPI adjusted the curve undulates from $1.2 to $1.8. By identifying the average price of bread over the 107 year period, which is $1.49, we can segment the 107 years into 8 distinct periods. The upward trend identified in the nominal price curve is replaced by periods of higher than average costs and periods of lower than average costs. By this measure the 8 distinct periods are: (1) 1915-1919 (WWI), (2) 1920-1933 (Great Depression begins), (3) 1934-1939, (4) 1940-1950 (WWII and US-USSR Cold War begins), (5) 1951-1981, (6) 1982-2007 (Great Recession begins), (7) 2008-2015 and (8) 2016-present. In periods 1, 3, 5 and 7, the cost of bread is above average. In periods 2, 4, 6, and 8, the cost of bread is lower than average. (see Figure 6- Also see Figure 6A to see price frequency with a Pareto Line)
Period 5 was the longest period of higher than average prices totaling 30 years. Period 6 was the longest period of lower than average prices totaling 25 years. Only 7 years of the 48 years since 1982 experienced above average prices (18.4% of the time). Prior to 1982, 39 of the 69 years experienced above average prices (56.5% of the time). Additionally, the periods from 1-4 appear eerily similar to periods 5-8. This is peculiar, because the pre-Great Depression economy was largely unsupported by subsidies. Lastly, note the frequency which bread was sold at a price less than average (Figure 6A). Will the prices of wheat and white flour move in a similar fashion to bread?
Figures 7 and 8 show that wheat and white flour prices move similarly to one another, but dissimilarly to bread prices. Indeed, Table 1 shows the correlation between the CPI adjusted prices of wheat and white flour to be .88- very strong. In contrast, the correlation between the CPI adjusted prices of wheat and bread, and white flour and bread are .36 and .60, respectively.
Notice how the nominal prices rise, but the CPI adjusted prices fall. Most impressively, observe the exceptionally stable prices of both wheat and white flour from 1981 to 2019. The price of wheat settles between $8 and $5. The price of white flour settles between $0.6 and $0.4. In contrast, the prices of wheat and white flour are exceptionally volatile up until 1948, when prices began to fall gradually from 30-year highs in 1947. I'll have to do more research to confirm, but I think it is safe to say that wheat, white flour and bread were scarce following WWII. Nevertheless, the prices continued to fall from 1948 to 1981 reaching the plane within which they now slide.
In Figures 9, 10 and 11, the annual rate of change in price- i.e. volatility- is captured in graph form. To our surprise, the least volatile period in terms of year-over-year price movement occurred in the post-WWII period from roughly 1950-1971. We know, however, that the prices were extraordinarily high during that post-WWII period (see Figures 5, 6, 7 and 8). So, despite stable prices, it was a period of high prices (and very likely, high demand with less supply). In contrast, the period from 1982 to 2019 appears much more volatile than any prior period. In fact, it appears that 1973 was the year after which prices would continue to move more quickly, but within historically narrow price ranges.
Wheat prices move the most and the fastest. White flour prices move substantially, but less so than wheat prices. Bread prices move within a consistent and narrow range with the exception of a few stints of volatility, which occurred concurrently with huge historical events like WWI and the Great Depression. [5]
*Note: For wheat and bread, there is a statistical blimp at 1979. I could not find the data for 1979. For this reason, the rate of change from 1978 to 1980 appears to show a large rate of change from 1979 to 1980. That appears so, but it is false. I just couldn't find the data. *
As Table 2 shows, the price movement of wheat does not strongly correlate with the price movement of white flour or bread. In fact, the two products that citizens see at their grocery store are shielded from the more volatile wheat market. Strange isn't it, how wheat, the principle ingredient of both white flour and bread, is alone a volatile market. Consistently, white flour and bread prices move together with a correlation of .762. In contrast, wheat and bread as well as wheat and white flour price movements do not strongly correlate. (see Table 2)
While Figures 5, 7 and 8 show the prices of wheat, white flour and bread from 1913 to 2019, we can break down the periods into three additional parts. This will help define the distinctness of the most recent period as well as its antecedents. Figures 12, 13 and 14 display 1913 to 1947. Figures 15, 16 and 17 display 1948 to 1986. Figures 18, 19 and 20 display 1985 to 2018/19. Again we ask, is the period from 1980/1985 to 2019 characterized by exceptionally stable and cheap prices of wheat, white flour and bread?
*Note: Keep in mind the figures displayed on the y-axis of each graph. The price movement can appear less significant if the parameters are not recognized.
From 1913 to 1947, white flour was sold at an average price of $0.87. From 1913 to 1917, the price rose from $0.85 to $1.40, an increase of 64% in just 5 years. In this period the average price volatility was 14.2%. From 1917 to 1932, the price fell from $1.40 to $0.60, a decrease of 57% over 16 years. In this period the average price volatility was -2.5%. From 1932 to 1947, the price rose again from $0.60 to $1.11, an increase of 85% over 16 years. In this period the average price volatility was 4.4%.
From 1913 to 1947, wheat was sold at an average price of $19.17. From 1913 to 1917, the price rose from $20.5 to $40.95, an increase of 99.7% in just 5 years. In this period the average price volatility was 20%. From 1917 to 1931, the price fell from $40.95 to $6.57, a decrease of 84% over 15 years. In this period the average price volatility was -8%. From 1931 to 1947, the price rose again from $6.57 to $26.25, an increase of 300% over 17 years. In this period the average price volatility was 9.4%.
From 1913 to 1947, bread was sold at an average price of $1.44. From 1913 to 1917, the price rose from $1.45 to $1.84, an increase of 27% in just 5 years. In this period the average price volatility was 6%. From 1917 to 1931, the price fell from $1.84 to $1.30, a decrease of 30% over 15 years. In this period the average price volatility was -1.7%. From 1931 to 1947, the price rose again from $1.30 to $1.43, an increase of 10.7% over 17 years. In this period the average price volatility was 0.63%.
Figures 12, 13 and 14 show a vast range of prices for wheat and white flour and a relatively large range of prices for bread. Wheat prices ranged from $40 to $6 ($34). White flour prices ranged from $1.4 to $0.60 ($0.80). Bread prices ranged from $1.84 to $1.30 ($0.54). As we review the following two periods, observe how the price ranges narrow.
From 1948 to 1986, white flour was sold at an average price of $0.85. From 1948 to 1972, the price fell from $1.11 to $0.73, a decrease of 34% in 25 years. In this period the average price volatility was -1.6%. From 1972 to 1974, the price rose from $0.73 to $1.06, an increase of 46% over 3 years. In this period the average price volatility was 20.8%. From 1974 to 1986, the price fell again from $1.06 to $0.49, a decrease of 54.3% over 12 years. In this period the average price volatility was -6.6%.
From 1948 to 1986, wheat was sold at an average price of $14.22. From 1947 (the high) to 1971, the price fell from $26.25 to $8.46, a decrease of 68% in 24 years. In this period the average price volatility was -4.1%. From 1971 to 1973, the price rose from $8.46 to $22.74, an increase of 169% over 3 years. In this period the average price volatility was 69%. From 1973 to 1986, the price fell again from $22.74 to $5.65, a decrease of 75% over 13 years. In this period the average price volatility was -10.2%.
From 1948 to 1986, bread was sold at an average price of $1.60. From 1948 to 1963, the price rose from $1.47 to $1.81, an increase of 22.4% in 15 years. In this period the average price volatility was 1.3%. From 1963 to 1972, the price fell from $1.81 to $1.51, a decrease of 16.3% over 9 years. In this period the average price volatility was -1.9%. From 1971 to 1974 , the price rose again from $1.51 to $1.79, an increase of 18.4% over 3 years. In this period the average price volatility was 8.9%. From 1974 to 1987 (the period low), the price again fell from $1.79 to $1.23, a decrease of 31.1% over 13 years. In this period the average price volatility was -2.9%.
In contrast to Figures 12, 13 and 14, Figures 15, 16 and 17 show the range of wheat, white flour and bread prices narrowing. The range of wheat prices remained the largest while the range of white flour and bread prices narrowed slightly, but remained fairly large. Wheat prices ranged from $5.65 and $26.25 ($20.55). White flour prices ranged from $0.49 and $1.11 ($0.62). Bread prices ranged from $1.23 and $1.81 ($0.58).
The range of wheat prices narrowed by $13.45 (39.5%). The range of white flour prices narrowed by $0.18 (22.5%). The range of bread prices narrowed by $0.04 (7.4%).
From 1987 to 2019, white flour was sold at an average price of $0.48. From 1987 to 2007, the price fell from $0.46 to $0.44, a decrease of 4.1% in 20 years. In this period the average price volatility was a microscopic 0.006%. From 2007 to 2008, the price rose from $0.44 to $0.60, an increase of 36% over 1 year. From 2008 to 2019, the price fell again from $0.60 to $0.44, a decrease of 26.8% over 11 years. In this period the average price volatility was -2.7%. Despite the onset of the Great Recession in 2008, prices remained exceptionally stable within a historically narrow price range of $0.42 and $0.60, or $0.18.
From 1986 to 2018, wheat was sold at an average price of $5.91. From 1986 to 1988, the price rose from $5.65 to $8.04, an increase of 42.4% in 2 years. In this period the average price volatility was 20.7%. From 1988 to 1993, the price fell from $8.04 to $5.77, a decrease of 28.3% over 5 years. In this period the average price volatility was -5%. From 1993 to 1995, the price rose again from $5,77 to $7.63, an increase of 32.3% over 2 years. In this period the average price volatility was 15.7%. From 1995 to 1999, the price again fell from $7.63 to $3.81, a decrease of 50.1% over 4 years. In this period the average price volatility was -15.6%. From 1999 to 2007, the price rose again from $3.81 to $8.2, an increase of 115% over 8 years. In this period the average price volatility was 11.5%. Oddly, from 2007 to 2009, the price fell from $8.2 to $5.8, a decrease of 29% over 2 years. In this period the average price volatility was -15.6%. From 2009 to 2012, the price rose again from $5.8 to $8.65, an increase of 49% over 3 years. In this period the average price volatility was 15%. Lastly, from 2012 to 2018, the price fell from $8.65 to $5.25, a decrease of 39.3% over 6 years. In this period the average price volatility was -6.9%. Where the other two commodities smoothed out during this period, wheat prices remained exceptionally volatile, but within a historically narrow price range from $5.25 to $8.65, or $3.40.
From 1988 to 2019, bread was sold at an average price of $1.41. From 1985 to 2007, the price rose from $1.31 to $1.49, an increase of 13.2% over 22 years. In this period the average price volatility was 0.6%. Note the exceptionally stable stint of prices from 1988 to 2006 when the average 19-year price was $1.37 with a price volatility of 0.2%. From 2007 to 2009, the price rose from $1.49 to $1.65, an increase of 11.1% over 2 years. The price remained within the range of $1.62 and $1.65 (2011) between 2008 and 2011. These prices during the Great Recession were the highest since the volatile 1970s, but not as high (or sustained) as the post-WWII period from roughly 1954 to 1970 ($1.60 to $1.80). From 2011 to 2019, the price fell again from $1.65 to $1.30, a decrease of 21% over 8 years. In this period the average price volatility was -2.4%. Despite the onset of the Great Recession in 2008, prices remained exceptionally stable within a historically narrow price range of $1.31 and $1.65, or $0.34.
Figures 18, 19 and 20 show that the ranges of wheat, white flour and bread prices continue to narrow. Wheat prices ranged from $5.25 to $8.65 ($3.40). White flour prices ranged from $0.42 and $0.60 ($0.18). Bread prices ranged from $1.31 and $1.65 ($0.34). In contrast to the range of prices found in Figures 15, 16 and 17, the range of wheat prices narrowed by a monumental $17.15 (83.5%). The range of white flour prices narrowed by a large $0.42 (67.7%). The bread price range narrowed by a historic $0.24 (41.4%).
Let there be no mistake. The prices of wheat, white flour and bread slide within a historically narrow range of prices from 1985 to 2018/19. Thus, the prices are more stable than in any prior period. Wheat and white flour prices are at historic lows. Bread prices are contained within a historically limited range.
Three Key Takeaways:
1) Bread prices are the least impacted by broader market volatility, i.e. volatility in the prices of its constituent parts like wheat and white flour do not significantly impact its retail price.
2) Bread prices are largely stable from 1913 to 2019 and are the most stable in the recent era from 1985 to 2019.
3) Wheat and white flour are volatile commodities, but prices still dropped tremendously from 1913 to 2018/19.
Questions for Further Discussion:
1) To what extent does government spending impact the stability of bread prices?
2) Did market liberalization of the 1980s-onward contribute to the increased speed by which the price of wheat moves?
3) How much wheat, white flour and bread did the world produce from 1913 to 2019? What is the ratio of people to bushels of wheat produced, over time? Has it changed dramatically? What outpaces what?
4) Since the inflation rate is so closely married to the price movement of consumer goods (CPI designated), what further details about the quantity, quality and port of origin of products explains the nature of so-called inflation?
4a) I'm not referring to purchasing power parity, but instead, how the nature of a good's supply, demand, acquisition and consumption relate to broader trends in consumer mentality and worker production. Is not our best gauge of the nature of inflation tied to the fundamental changes in the supply, demand, acquisition and consumption of goods?
4b) Is not inflation largely impacted by the supply of essential goods on the market? Does not the value of the iPhone increase in value only insofar as essential goods are abundant and relatively cheap?
4c) In principle, a nonessential good is worth far less if essential goods are scarce. Thus, is there not an inverse relationship between the value of essential goods and the value of nonessential goods?
Footnotes:
1) let it be known that I cherish these aims, but theoretically they are not of the first concern of the individual, family, community or society unless the first order of necessities are met: food, water and shelter. Thus, the American Moral Economy is a byproduct of abundance. Older tenets of the English Moral Economy like communal price negotiation are entirely abdicated by the people to the authority of the Justice Department- a flotilla of lawyers and bureaucrats. Indeed, the people of America have forsworn their right to collective action in the marketplace in material matters in favor of higher-minded aims such as justice and equality. If there is a sense that American society is currently subject to an autoimmune disease, it is because it is. Where there is ambiguity as to who is the enemy, it is only natural that the body send antibodies to destroy whatever approximately is its enemy. You can only hope that the autoimmune response does not target essential functions.
2) With regard to currency, if the Federal Reserve were to engage in the equivalent of a corporate buy-back of shares outstanding, then the value of each share relative to goods available would rise. Hence, the inherent value of the dollar would rise and prices would fall, nominally. Thus, initiating a deflationary era in monetary history. We need to consider the impact of a deflationary policy and if, like with corporate buy-backs, there is a benefit in leveraging a higher valued stock.
3) Cost is the burden of the price respective of macro-economic variables such as supply, demand, currency circulation and rates of foreign exchange. Price is the tabulated record of sale of the item in one period in its own terms unless otherwise stated.
4) The buying power of the dollar is never the same. However, the cost of an item respective of abundance, population size, market size and quantity of circulation impacts the relative value of the dollar. So, while the individual dollar is worth less today than yesterday, there are also more people, more goods, more markets and more dollars in circulation. The dollar respective of these factors fairs better than the dollar of yesterday. This is not an absolute law and it can change. However, it is the state in which we now live. Thus, expectation is baked into the value of the dollar given the trajectory of stock, population and circulation (based on the recent past).
5) It appears that the further we get from the field and the closer we get to the grocery store, the smoother the price movement. In a future article, we will devote some time to see what may shape the market for wheat, white flour, bread and many other products: large government contracts, increased shipping tonnage, improved seeding and produce preservation, improved supply chains, increased government welfare and more, if each or any play a role in the decrease in wheat prices and the decrease in and stabilization of bread and white flour prices.
Bibliography:
Dina Spector, "Here's how many days a person can survive without water." Business Insider. March 5, 2018.
Bureau of Labor Statistics, "Flour, white, all purpose, per lb. (453.6 gm) in U.S. city average, average price, not seasonally adjusted, U.S. city average." Data extracted on: September 27, 2020 (3:39:48 PM)
Bureau of Labor Statistics, "Bread, white, pan, per lb. (453.6 gm) in U.S. city average, average price, not seasonally adjusted, U.S. city average." Data extracted on: September 28, 2020 (3:33:53 PM)
U.S. Census Bureau., United States. Bureau of the Census., United States. Bureau of Foreign and Domestic Commerce., United States. Dept. of Commerce and Labor. Bureau of Statistics., United States. Dept. of the Treasury. Bureau of Statistics. (1879). Statistical abstract of the United States. Washington: U.S. G.P.O.. (1978), 99th Edition.
United States. Bureau of the Census. (1975). Historical statistics of the United States, colonial times to 1970. Bicentennial ed. Washington: U.S. Dept. of Commerce, Bureau of the Census.
National Agricultural Statistics Service. United States Department of Agriculture. Economics, Statistics and Market Information System. "Agriculture Statistics." United States Government Printing Office, Washington.
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