Inflation is worse than you think

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I don't just mean that the rate of inflation is higher than the government's reported rate--that's evident to anyone who's paying attention. But there are other costs that come along with higher inflation--costs that strike at the heart of a properly functioning market economy. This post is about dealing with one of those.

The free market works great--as long as certain conditions are met. In economic theory, one of those conditions is "perfect information." For competition to yield the efficiency that economists theorize, every buyer and seller needs to know the price being charged by every other firm.

In the real world we can't reach perfect information, but we can get reasonably close. For example, if you drive past several gas stations twice a day on the way to and from work (and you pay attention), you can be reasonably informed of the local market price for gasoline.

When the inflation rate is very low, there's an easy simplification that saves everyone time and effort--over time, you simply learn what the price is for many of the things you buy. Prices that stay stable for months at a time are easy to remember, and when that price changes you can assume that it's a real change in price (not just inflation working its way through the system).

Just in the last few months, inflation has climbed to the point that it invalidates that simplifying assumption--you can't just assume that the price will be the same as last month. As Paul just described in his recent post, this gives merchants cover to play fast and loose with the regular price, knowing that you can't keep track of everything.

The tactical solution is what Amy Dacyczyn calls, in her classic book The Complete Tightwad Gazette, a "price book." A price book is just a notebook, with a page for each item that you buy, where you record prices that you've seen, noting down the date and which store had that price. (For items that come in multiple sizes, note down the package size and also calculate the unit price.)

That's the information that you need to know in order to figure out if you're getting a good deal. You certainly can't trust the store to be up front about regular prices. But with a price book, you know what other stores have been charging over the past few months, so you can see whether a so-called sale actually gives you a discount from what you'd pay elsewhere. When inflation is running high enough that you can't just remember prices, a price book is the only way to make wise decisions about things like stocking up.

Of course, this is extra work on your part--that work is one of the many hidden costs of higher inflation. Especially bad, it's a cost that needs to be paid by every market participant. (Some pay it by undertaking the record-keeping burden. Others pay it by accepting that they'll more often overpay for goods.)

The strategic solution, of course, is to get inflation back down to the point that the simplifying assumption--that the current price is the same as last month's or last year's price--is valid again. Unfortunately, the Fed is moving in exactly the wrong direction for that.