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The resurgence of inflation in 2021 was like the rumblings of a volcano that had been dormant for four decades. That means most active researchers and decision makers had no personal familiarity with the messy politics of the issue. Economists had read about it, and studied data and events from other countries, but for the most part hadn’t lived it. Political leaders could dust off old sound-bites, but hadn’t felt public reaction to them.

Prices go up and down all the time, for many reasons. To an economist, inflation is different, it’s a general increase in prices, which can be defined equivalently as a decline in the value of money. Inflation is a macroeconomic phenomenon with complex relations to other macroeconomic variables like economic growth, unemployment and interest rates.

The populist understanding of inflation is simpler—it’s harder to make ends meet. The paycheck doesn’t stretch as far, leaving smaller savings or bigger debts at the end of the month.

In 2021, the current political administration adopted the economist view. Price increases were asserted to be transitory, and due primarily to supply chain problems, and thus were not macroeconomic inflation. This seemed tone-deaf to popular complaints about having trouble making ends meet. The administration wanted to avoid painful medicine for inflation—raising taxes, cutting spending, raising interest rates and tightening lending.

In 2022, the administration reversed ground to the populist view of inflation, touting solutions like giving people money and controlling prices. To economists, giving people money feeds inflation, and controlling prices might temporarily relieve the symptoms, but exacerbates the underlying macroeconomic issues. However government money plus controlled prices does make it easier to make ends meet.

All of this is familiar, the party in power wants to avoid painful inflation medicine, and to prescribe symptom relief instead. The other party blames the party in power for the inflation, without specifying whether it means the future macroeconomic problems or the current difficulties in making ends meet, which allows it to criticize all measures as bad for one or the other interpretation of inflation.

I think this basic dichotomy is understood by most political leaders and economists, but what I don’t see in current discussions is appreciation for the subtleties of the populist view. Ordinary consumers are treated as foolish and myopic, considering only this week’s grocery bill, not the overall effects of inflation on wages, employment, debt, asset prices and other factors; effects that will leave many consumers better off in the long run from inflation. Thus up to June 2022, consumer perceptions that inflation was higher than reported numbers was blamed on high gasoline prices—which were not from general decline in the value of money—because gasoline is purchased frequently and is a standardized product with widely advertised price.

But if you read complaints that get traction on social media, gasoline prices never featured prominently in inflation complaints. There was a lot complaining, but the high gasoline prices were generally blamed on environmental actions, or Russia, or profiteering by oil companies; not on inflation. The common denominator, then and now, is that prices for ordinary people are going up due to evil and sneaky actions rather than interest rates or government deficits. People who were adults in the 1970s remember how inflation politics turned on specific complaints like this, and how important it was to listen carefully to what populist feeling was.

Now that gasoline prices have moderated, populist complaints are focused on food and household items. Economists are apt to look at inflation indices that exclude energy and food, because those prices are volatile for reasons unrelated to general inflation, so contain more noise than signal. But for consumers, those are the two most important prices that are experienced frequently. Moreover what people are complaining about are not transparent price increases but tricks like offering smaller sizes or more diluted products in identical containers for the same price; or lowering quality, or charging for ancillary products and services that used to be free. Even if these increases are not material for the overall economy (and economists tend to focus on overall economy inflation measures like the GDP deflator rather than consumer price measures) they generate a lot of populist dissatisfaction. They encourage the idea that ordinary people are being victimized by big business, big government, special interests and faraway elites.

All of these tricks are tracked, at least in theory, by the Bureau of Labor Statistics (BLS) in its Consumer Price Index (CPI). But one important one is not—scanner overcharges. The BLS gathers price information from the published shelf prices, not what is charged at checkout (a BLS collector can check the price if she has reason to suspect it is wrong, but the BLS does not collect any information about how often this happens, which suggests it considers it trivial).

Dhruv Grewal, Toyota Chair of Commerce and Electronic Business at Babson College, does not believe the increase in scanner overcharges is a deliberate policy of retailers to cheat customers. The regulatory cost and reputational hit from any systemic policy far exceeds any potential gain; and individual store managers have too much else to worry about for issuing deliberately false shelf labels. Rather it is the labor shortage from the pandemic, plus the increased volatility in prices, that leads to slower updating of shelf prices while computer prices change more quickly. In inflationary times, that leaves shelf prices systematically lower than computer prices.

How big is the issue? The Federal Trade Commission (FTC) is charged with monitoring this on a national level, but it last did a comprehensive nationwide survey in 1996. That found mispricing in about one item in 30, but that overcharges and undercharges were roughly equal. Of course, inflation was much lower then, so if the errors are due to stale shelf prices, today we would expect more overcharges relative to undercharges. State inspectors conduct inspections in most states, and there have been smaller follow-up academic studies, but there is no good data on post-pandemic scanner overcharge rates.

I have always had the habit of adding up prices as I shop. This is not out of concern for scanner accuracy, I did it before scanners came into widespread use. I just can’t see a number without doing something with it—adding it, or thinking about its prime factors, or checking for interesting qualities. This may be a mild OCD symptom, but to me it seems like at least as good a way to occupy my brain that worrying about which celebrity marriages are in trouble, or what I should have said when an annoying person made fun of my grammar.

It is often the case that the scanner total does not match my mental total, especially if I buy more than 20 or so items. Pre-pandemic, overcharges and undercharges were about equal. I only complained if the overcharge was very large—and then of course I had to go through the receipt to figure out which item caused it. I don’t memorize every price, but I can usually spot something a dollar or more overpriced. Most states allow penalties such as getting the item free, but in my experience it’s very hard to get these. Cashiers or managers will quickly correct the price to the shelf price—sometimes apologetically, sometimes grumpily—but if you ask to get the item free you will be met with arguments, delays, forms and other nonsense.

Anyway, I have noticed in the last year that error rates have increased, and they are almost always overcharges. This is anecdotal only, but I did some random sampling and found overcharge rates are now about 5%, versus undercharge rates of 2%, and overcharges add something like 0.5% to average purchase baskets. This is a small-scale survey, but it gibes with the widespread social media meme that scanners are cheating people; and that the government agencies that should prevent or at least measure this—the FTC, the BLS and state consumer agencies—are ignoring the increased problem. Indirect support for this view is that major retailers mostly canceled in 2020 solutions like electronic shelf labels and price-scanning robots that would eliminate checkout errors.

The problem here is not that consumers are overpaying. If the problem is fixed, it will be by changing the listed shelf prices, not by reducing the prices consumers pay. But even if it represents relatively small dollar amounts, it contributes significantly to popular anger. It inclines people to believe that their problems making ends meet are caused by evil conspiracies and incompetent government agencies rather than fundamental economic forces. It encourages punitive solutions rather than cooperation for the common good of improving the economy.

Political leaders from the 1970s would be paying more attention to what people are actually saying today, and less to textbook accounts from that period. They would direct the FTC, BLS and state consumer authorities to gather data on scanner overcharges more vigorously, and take more action where it was warranted, and to inform the public better about their efforts. Economic researchers from the 1970s would be paying more attention to how prices are increased—size reductions and other tricks rather than changes in listed prices—to gauge public attitudes toward inflation.

Inexperienced researchers and leaders make it more likely that we will get economically dysfunctional political reactions to inflation—price controls and increased deficits—and pressure on central banks to avoid the painful medicine necessary to control inflation. Like too many other political issues today, the debate will no longer be about cooperating for the public good. An angry group will be convinced it is fighting evil interests, while the opposing group will consider the angry group to be ignorant of economics. Nothing good can come of that conflict.

Aaron Brown is the author of many books, including The Poker Face of Wall Street.  He's a long-time risk manager in the hedge fund space.  

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