Another Nail in the Coffin of Inflation

07.27.17
Written by Richard Hokenson 

It is a mistake to always interpret low inflation in the United States as reflecting weakness in the pace of economic activity. Another nail in the coffin of inflation results from changes in the financial arrangements of families, changes that result in heightened resistance to higher prices. The number of dual earner married couples, i.e. those with lower sensitivities to higher prices are shrinking (see Chart 1) while the number of single-earner married couples, i.e. those with greater sensitivities to higher prices, is increasing as one spouse, usually the wife, exits the workforce (see Chart 2).

Families in which both the husband and wife work can be viewed as “Families with More Money than Time”. Because time is their most precious issue, they tend to have lower sensitivities to higher prices. For example, if your spouse likes a certain brand of cereal and you go to the store and find that the price has increased, you are very reluctant to experiment with another brand because the cost of that experiment if it fails is very high. In other words, you are willing to pay whatever is charged to avoid a return trip to the store. Further accentuating this are changes in who does the shopping. Husbands tend to be more brand name loyal.

Families in which only one spouse works can be thought of as ‘Families with More Time than Money”. For the most part, these are families that voluntarily went from two pay checks to one, principally reflecting the desire of younger women to fold work around the family. The focus is to make that one pay check stretch further so this group has a much higher sensitivity to higher prices. They are much more likely to experiment with other brands or even the store brand if the preferred brand raises its price. If the substitution turns out to be disliked, it is not a big problem as one will be back to the store in a few days. This is the group that has the time to comparison shop, to shop at multiple stores, etc. in a similar vein, I am reminded of the results of a Ph.D. dissertation done several years ago in Sweden. The researcher viewed the number of housewives as an information pool on prices. As more women went to work, the pool shrank and the balance of power on pricing shifted to companies. As they returned home, the information pool grew and the balance of power shifted more towards the
housewives.

The net result is an increasing armada of inflation fighters, persons who are increasingly resistant to higher prices. It helps to explain why firms find it increasingly difficult to make higher prices stick. It is also an important issue behind the bifurcation of retail trade, a topic we will discuss in a subsequent analysis.

 
 

This update was researched and written by Richard Hokenson, as of July 27 2017