Focus on increasing buying power, not reducing prices

The recent Consumer Price Index report from the Bureau of Labor Statistics showed that prices have risen by three percent from one year ago. This is one percent above the Federal Reserve’s two percent inflation target, which they base on the Personal Consumption Expenditure Price Index.

No matter what these indexes say, people are paying more today for what they purchase. Egg prices have been in the news, as one dozen eggs now costs over $5. Some restaurants have even added an egg surcharge. Many may remember when just a few years ago, an egg sold for around a dime.

President Donald Trump campaigned on lower prices. Since elected, he has noted that this will be harder than anticipated. He also blames former President Joe Biden for higher prices, highlighting the tendency of politicians to take credit for successes and place blame on others for failures.

In reality, prices are at best weakly within the control of the president. The basic economic principle of supply and demand drives prices.

For example, when goods or services are in short supply, and demand exceeds supply, prices rise. That is the case with eggs, as the avian influenza (or bird flu) is infecting egg laying chickens, stopping their egg production. To limit the spread of the virus, many flocks have been culled, further adding to egg shortage woes.

When prices drop, goods and services cost less. This is certainly attractive to consumers. However, the people charging lower prices receive less income, which means they have less to spend.

Consider the highly volatile oil market, impacted not only by domestic supply and demand, but world affairs, particularly in the Middle East. People like to pay less for the gasoline they put into their vehicle. At the same time, states like Texas, New Mexico, North Dakota, Colorado, Oklahoma, and Alaska are the largest oil producing states, relying on oil revenue to balance their budgets. Lower oil prices mean less income for them and their residents.

So rapidly changing prices carry with them a double-edged sword. Consumers are the last-mile receivers of goods and services, with every entity along the supply chain impacted by every price change.

Though everyone likes to pay less for their purchases, widespread price drops, or deflation, means that everyone would also have less income. Prices ultimately translate into income, with the balance between income and prices determining buying power, which is what consumers should be interested in.

The most unfavorable situation occurs when price increases are driven by supply shortages that cannot easily be brought under control. The avian influenza driven egg price surge is one such example. A similar phenomenon can occur with orange juice from Florida or Brazil, if an unexpected freeze during growing season or orange tree disease results in bushels of oranges being lost. The short-term impact of such an event is higher orange juice prices.

The U.S. economy is highly complex, subject to external and internal risks that can be managed but not eliminated. Predicting when a risk will emerge is nearly impossible to reliably forecast.

The lesson learned from the egg price surge is that no politician, even the president, has the power to restore prices to what they were in 2020, before the COVID inflation surge that began in 2021. Many people now earn more money to make up for higher prices. Investment accounts are also generally higher over the past five years, even with the recent market meltdown.

What is more important to focus on is buying power, not absolute prices. Increased buying power can be created with higher productivity, which means that more goods and services can be provided with the same effort. This is why technology advances (and research) are critical to improve the financial condition of consumers. This means that if the spigot of research to enhance technology is turned off, the buying power of consumers is guaranteed to drop.

Buying power can be measured for individual goods and services. For example, how many hours or weeks of work does it require to purchase a home, a vehicle, or to feed your family? What many people may discover is that their buying power may not be significantly less today compared to five years ago for many goods and services. Eggs are certainly an outlier. But $70 dollars for a barrel of oil today is a bargain compared to many periods in the past. Even $3 per gallon of gasoline at the pump is reasonable.

Prices are deceiving. Yet they are what consumers are confronted with every time they make a purchase. Of course, computing buying power is exceedingly difficult.

However, as buying power increases, consumers can purchase more goods and services, and begin to accumulate wealth. That is what should be the focal point of discussion amongst consumers. Indeed, increasing buying power is the true indicator for a wealthy nation and a prosperous population.