Is Inflation Really 1.6%, or Is the BLS Getting Scammed?

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Is Inflation Really 1.6%, or Is the BLS Getting Scammed on the CPI?Official government measures show that inflation, at 1.6% in January 2011, is still below the Federal Reserve's target of 2%. But consumer products companies are running into a problem: Their costs are rising faster than that, but they don't want to scare away consumers by raising prices. Considering that prices for many raw materials -- including cotton, corn and wheat -- are at or near record levels, consumer retailers are being forced to make some choices about how to keep their profit margins healthy.

One of the sneakiest of their options is to reduce how much product they put in a package, but keep the price the same. A bag of sugar costs the same, but quietly, they reduce the weight from five pounds to four. They put fewer potato chips into the same size bag, or add more air into cheese and ice cream. Consumers who might have paid $6 a pound for coffee now pay the same for three-quarters of a pound, reports the Spokesman Review.

In the case of coffee, that's a 33% price increase that manufacturers are probably hoping you won't notice. Is there any logical reason for you to pay 33% more for coffee? Well, the price of coffee has gone up even more by one measure -- according to Espresso Coffee Guide, the iPath Dow Jones-UBS Coffee Total Return Sub-Index ETN has gone up 70% since the end of 2009. And Peet's Coffee & Tea (PEET) raised its prices in September to respond to a 35% rise in the price it pays for green coffee beans since the beginning of 2010.

But an analysis of a broader basket of consumer products suggests that coffee is among the most inflated items. A January study by Consumer Reports provides the following examples of reduced package sizes. Assuming the manufacturers are keeping prices the same, the following 10 examples represent an average price increase of 12.2%:

  • Tropicana orange juice +7.8% due to a reduction in the amount of product from 64 to 59 oz.;
  • Ivory dish detergent +20% from 30 to 24 oz.
  • Kraft American cheese +8.3% from 24 to 22 slices;
  • Kirkland Signature (Costco) paper towels +11.6% from 96.2 to 85 sq. ft.;
  • Haagen-Dazs ice cream +12.5% from 16 to 14 oz.;
  • Scott toilet tissue +9% from 115.2 to 104.8 sq. ft.;
  • Lanacane first aid spray +12.4% from 113 to 99 grams;
  • Chicken of the Sea salmon +13.3% from 3 to 2.6 oz.;
  • Classico pesto +19% from 10 to 8.1 oz.; and
  • Hebrew National franks +8.3% from 12 to 11 oz.

Are Companies Fooling the CPI?

January's inflation statistics do not reflect that 12.2% inflation. The core Consumer Price Index -- which excludes what are considered "volatile" food and energy prices -- increased just 0.2% according to the Labor Department. When you include food and energy -- which, after all, are things that consumers actually have to buy, the CPI was up 0.4%, 0.1% more than economists had expected -- and food and energy were responsible for more than two-thirds of the overall CPI rise.

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But does the CPI reflect those stealth price increases? According to the Bureau of Labor Statistics, the answer is maybe. The BLS notes that it sends data collectors into stores every year and "if the selected item is no longer available, or if there have been changes in the quality or quantity (for example, eggs sold in packages of ten when they previously were sold by the dozen) of the good or service since the last time prices were collected, the economic assistant selects a new item or records the quality change in the current item."

It is possible that the BLS's national office makes adjustments to reflect smaller quantities. According to the BLS, "the recorded information is sent to the national office of BLS, where commodity specialists who have detailed knowledge about the particular goods or services priced review the data. These specialists check the data for accuracy and consistency and make any necessary corrections or adjustments, which can [include] an adjustment for a change in the size or quantity of a packaged item."

Given the huge difference between the small rises in the prices of food and energy reflected in the CPI and the much higher amounts that consumers are paying when you adjust for smaller package sizes, it looks like something is being lost in tracking the prices that consumers really pay.

And one thing seems clear -- with the median family income down 8.1% since 2000, consumers can ill-afford to get squeezed by this hidden inflation.

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