Is Inflation Actually Going Down?
I now have 3 years of Costco receipts. The 2023 pricing data is mixed but far from uninteresting. Does this mean cash is trash?
A lot of the collective establishment distrust that I think we’re now seeing manifest at a large scale through many different avenues has some root in the currency and in government statistics, in my humble opinion. When I started learning about how CPI figures are gamed, there was really no going back for me. I wrote about it in a 2020 in article called The No Inflation Myth. Very few people read it. But the core argument made in that piece holds true to this day.
I cite government statistics all the time but I really don’t trust them all that much. Since I expected CPI to lie to me following the COVID lockdown money bazooka, I’ve been saving my Costco COST 0.00%↑ receipts since April 2020 in an attempt to get a real sense for how much prices would increase in the subsequent years following all the money printing. I now have 3.5 years of these receipts.
In June 2022, I calculated my personal household rate of inflation for groceries. The year over year rate of change came out to 23.1% from Meijer and Aldi on average. I felt this was my true inflation figure at least pertaining to the essentials. For a more itemized spotlight, I picked the six items that we purchased most frequently from Costco. That inflation rate came out to 28.7%. Paid subs can read the whole thing here:
Now that we’re well into October and the year over year rate of inflation as measured by the CPI has been generally in decline, I thought it would be a good time to revisit some of these figures and see where we stand today. I’ve still been saving these Costco receipts and I have noticed a very big change in how our purchasing habits have adapted over the last 12 to 16 months.
There has been a noticeable pivot in what we’ve been purchasing and where we’ve been purchasing it. For instance, the last time I updated my personal grocery inflation we were buying Oikos Yogurt and we no longer do that. We haven’t bought beef at Costco in some time and we’ve been purchasing more frozen chicken tenders because my daughter will actually eat them. So some of these year over year comps will be a little different.
Let’s get started!
Costco (de)flation?
Inflation or deflation? It’s one of the big questions that the macro analysts can’t currently agree on: are we going to see another spike in the CPI or is it heading negative? Money supply is shrinking, but generally price inflation is sticky when it comes to consumer goods. Well, turns out some of the items we buy at Costco have indeed come down in price since last year:
The first thing that jumps off the page to me is the decline in canned chicken, cheese sticks, and coffee. Frankly, the decline in the price of Costco’s Kirkland Signature 3lb Columbian coffee can is probably not at all surprising to anyone who has been following this:
But interestingly, the price of the 40pk of bottled water has come down as well. What we don’t have is a perfect comparison against my data from last year because we haven’t been buying Oikos or the beef patties at Costco this for a while. Frozen Pizzas are flat - though anecdotally I think I’ve noticed a difference in the crust this year. Dog biscuits, fig bars, and paper products are all up. However, if someone just purchased one of each item in a single visit in Q3-22 and then again in Q3-23, the total cart would have actually been 1.9% cheaper this year than last year. So deflation then? Maybe not…
Aggregate Costs
This Costco data got me thinking; are we actually spending less money on groceries this year? It sure doesn’t feel like it. Turns out, we’re not. Where we are very fortunate to not have pricing increases is in our fixed mortgage. But we have increases largely everywhere else. Not only are we spending more on groceries, we’re pretty much spending more on everything judging by our credit card transaction history.
But for the sake of this article, we’ll keep it to the same stores that I focused on last year. We do almost all of our “we need to live this week” purchases between Meijer, Aldi, and Costco. I’m not going to share raw spending figures. But this is how that spending growth breaks out by both store and by quarter since 2022 from a rate of change standpoint:
Over the last two quarters our total spending between the three stores has increased by about 15% year over year. Q2 was interesting because we bought more at Costco and that came at Meijer’s expense. That reversed in Q3. But the aggregate story is the same. +15% year over year. Deflation? Nope. Inflation is still a problem for our household and this is even with monstrous inflation from 2022 as a base.
I’m very curious what you all are seeing in your own shopping carts so feel free to share some personal anecdotes in the comments. I’ve opened the section up for all.
CPI Says?
Of course, figures lie and liars figure. I have no idea what the September CPI is going to read tomorrow. As I said from the top, I don’t really put a lot of faith in government numbers. I see these figures as just estimates modeled by people who are largely unimpacted by their own policies. And that’s obviously not a compliment.
But in the interest of game theory, let’s assume my household is not an anomaly. Let’s assume other people are also still dealing with increased costs even if they’re not monitoring their spending by store and by item. Is it out of the realm of possibility that CPI is going to surprise to the upside tomorrow as it did last month and as the PPI (producer price inflation) just did this morning?
For the benefit of this exercise, let’s assume September CPI does indeed move higher than expected tomorrow. The question then becomes what narrative will the market run with? Dollar down means buy stonks? Or dollar down means rates higher, which means sell stonks? I really don’t know. But I lean high CPI tomorrow is detrimental to risk assets shorter term.
Obviously, I’ve been banging the gold and bitcoin drums for the entire existence of this Substack publication but essentially all risk assets rerated when the central bank brought the bazookas out and pumped up the balance sheet (again) in 2020:
While the Fed has indeed rolled off about 11% of assets since the peak last May, it’s still nearly twice the pre-lockdown level of $4,200,000,000,000. That’s a big unwind that still needs to take place and it’s probably not going to bode well for equities, in my view.
Sentiment Alert
I’ll leave you with one final thought. I shared a version of this via Notes already but it’s worth repeating here. I have a friend who I’ve known for almost ten years. He’s a smart guy and I really respect his opinion. We’re the nerds who break away and talk stocks at group get togethers after we’ve had a couple beers. He said something to me on Saturday that I’ve thought about a couple times since. While we were arguing the merits of taking profit in his NVIDIA NVDA 0.00%↑ long, he dropped this nugget after telling me he’d never sell:
“You’re an idiot if you’re in cash.”
In the moment, I didn’t disagree beyond adding the current yields from money markets and bonds are attractive compared to straight cash (homie). But let’s really explore the idea a bit more. Avoiding cash entirely assumes:
asset prices can’t go lower
interest rates will stay high
inflation will stay high
banks are solvent
If even one of those things prove to be wrong, the idiot holding cash may not be such an idiot after all. But the larger takeaway for me is I think this is indicative of where we are from a complacency standpoint. I believe we’re about to relearn some hard lessons and it probably ain’t gonna be pretty.
Disclaimer: I’m not an investment advisor. I hoard Wilfrid Laurier notes in an old Reebok shoe box under my bed.