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Economics-101

Hidden inflation

I’ve addressed inflation many times before in this column, but today I want to look at a little more camouflaged form of inflation. Twenty years ago I bought my first investment property in Calgary. At that time durable goods (items that have a life expectancy in excess of three years i.e.: washers, dryers, stoves, fridges….etc.) came with a warranty of 10-20 years. Items such as mattresses even came with a lifetime warranty. I just purchased a new fridge a few days ago for one of these residences and to my complete shock I was informed that the warranty was only for one year. One year!? Of course the economist in me expected the purchase price to be 1/10th – 1/20th of what I previously paid. The truth of the matter is that fridges as well as other durable goods have steadily increased in price over the past 20 years. Manufacturers know exactly how long their products will last. So now I can expect to repair this fridge in just over a year and probably completely replace this unit within three years. Now over a 20 year period I will likely replace this fridge 5 or 6 times. So I can expect to pay 5 to 6 times more for a fridge over the next 20 years. However government inflation statistics will only calculate the purchase price of the fridge, which is marginally more expensive than the previous year. As with many government inflation statistics this misses the true cost. This revelation spurred me to do some research into other durable goods’ warranties. Across the board washers, dryers, fridges, microwaves, stoves…etc. have essentially seen their lifetime or 20 year warranties whittled away to a measly one to three year warranties. More surprising was that the mattress industry is actively lobbying its manufacturers to lower warranties to 5-10 years. Are you starting to see the picture? Products you would typically purchase once in 25 years are now going to have to be replaced every 2-3 years. This is a form of inflation that is not captured by any government inflation report.

Looking beyond the durable goods we find a smoke and mirrors game being played in the pork industry. When you go to the grocery store you will no longer find the standard 500 gram packages of bacon. The price has remained the same; however the quantity of bacon that you receive has shrunk to 375 grams. Most people assume that the price of bacon has not risen because the package looks the same, but the truth is the price per gram is up 25%. Regardless of how much bacon has increased in price, it really doesn’t matter to the government because Canada’s inflation gauge does not include food and energy. Apparently eating and keeping yourself warm in balmy Canadian winters is not something that the government considers essential. This is fundamentally the same as determining the takeoff weight for an aircraft without considering the weight of the wings. Leave it to government to screw up a calculation that a below normal intelligence hamster could figure out.

These are just a couple of things to keep in mind when Statistics Canada tells you that there is no noticeable inflation in the Canadian economy.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.



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About the Author

Derrick Nicholson is a Currency Strategist. He has been in the industry for the past 20 years, and specializes in mitigating currency risk for companies doing business outside of Canada.

Questions and inquiries can be directed to Derrick at [email protected].

 



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The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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