Ernst & Young Market Basket Highlights Inflation vs. Deflation in the Consumer Price Arena

Imagine economic trends as a sort of gladiatorial combat with manufacturers and retailers engaged in struggle before a vast and sometimes participatory audience of consumers (CPI—thumbs up or thumbs down?). The metaphor may seem far-fetched, but the statistical factoids support the interpretation of a struggle between sectors to control inflation on the one hand and deflation on the other, according the Ernst & Young’s Quarterly Market Basket.

Ernst & Young Market Basket figures show that 4Q 2004 saw the continuation of a five-year deflationary trend in consumer sales categories. These E&Y figures do not include the “inherently inflationary” categories of shelter, transportation, and medical care. The Consumer Price Index, on the other hand, shows an overall inflationary trend over the same five-year period, with a 9.5% rise in prices. Significant increases in energy costs pushed the CPI for October 2004 up to 3.2%, compared to 1.9% in December 2003. U.S. economic productivity and reluctance among retailers to raise prices are credited with keep inflation down in categories other than shelter, transportation, and medical costs.

The fourth quarter of 2004 showed deflation in the consumer categories of toys, apparel, consumer electronics, jewelry, and sporting goods. Toys showed 4.8% deflation in October 2004, following a five-year trend that has seen prices decline 20.7% overall during that period. Jewelry had the next-highest rate of deflation in October 2004, at 1.9%, with a 9% rate over the past five years; compared to apparel, with a deflation rate of 0.6% in October 2004 and a five-year rate of 8.5%. Consumer electronics had a rate of 1% in October 2004, but a longer-term, five-year rate of 4.9%. Sporting goods fared best in October last year, with a deflation rate of 0.9%, and has been the least deflationary category of those in the E&Y Market Basket, with a rate of only 2.8% over the last five years.

In fact, the lower costs for goods that cheer consumers intent on holiday spending are markers of shorter-term benefits, as manufacturers struggle to raise the prices they can get from retailers, especially retail’s global giants, who themselves are fighting for market share, while all parties face issues of overcapacity, weak demand, or increasing Asian production. Still, according to Jay McIntosh, Ernst & Young’s Americas Director of Retail and Consumer Products, much of the reason for the longer-term deflationary trend is simply the power of “mega-retailers and their reluctance to raise prices.”

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