No Joe, price gouging, shrinkflation are not the problems

Recently President Joe Biden said that he will take action to reduce high prices. He notes that prices, on average, have increased by nearly 20% since he took office. Americans disapprove of his handling of the economy because their incomes have increased much less than 20%. Biden says he will fix this.

He sees that the majority of Americans do not approve of his handling of the economy even though growth has been solid, and the unemployment rate remains under 4%. Americans simply feel badly because when prices increase faster than incomes, Americans are forced to buy less, resulting in a decrease in their standard of living.

Biden claims that his policies, coupled with the Monetary Policy of the Federal Reserve, brought the inflation rate down from the peak of 9.1% to the current level of 3.1%. He says that is a victory that should be celebrated.

He also says that because the reduction in inflation is not being reflected by positive attitudes, he must do more. Reducing inflation means that prices will not rise as quickly as they have in the past. It does not mean that prices are coming down. But he knows how to bring prices down.

Biden says much of the inflation is caused by big corporations who are price-gouging the consumers. Price gouging means that corporations are just jacking up prices to increase their profits. He wants to put a stop to it.

The reality is that price gouging does not exist. This condition occurs when someone believes the market price of a product is higher than they think it should be. Based on the inflationary increases in the cost of production, corporations raise their prices to maintain profit margins. In the end, however, they just charge the market equilibrium price.

President Biden has economists on his staff. One of them should explain what a market equilibrium price is.

He also complains that there appears to be shrinkflation. He says the Cookie Monster agrees, saying “Me hate shrinkflation! Me cookies are getting smaller.”

When corporations are faced with rising costs for both labor and materials, the cost to produce a cookie increases. The corporation has a choice, knowing that they must maintain profit margins.

They could raise the price. However, noting that food prices in general have risen almost 30% since Biden took office, raising the price may mean that consumers can no longer afford to buy cookies. Instead, they often decide to reduce the amount of materials and labor that they use for each cookie.

That way they can sell the cookie for the same price. The difference is that the cookies are smaller. This is noticeable in many food products. Next time you purchase a half-gallon or even a quart of ice cream, you will notice neither are nearly as large as a half-gallon or quart. The companies reduced the size indoors to keep costs done and hold the price constant.

Another way Biden wants to keep prices down to help consumers is to cap credit card late fees at $8. Currently, those fees are $32 on average. Since consumer credit card debt is now more than $1.3 trillion and delinquencies are rising, he feels this will help consumers.

The impact of this will be negligible.

There are two things he can do to not only lower inflation but to actually lower prices. Energy accounts for nearly 30% of the Consumer Price Index. He could drastically lower energy prices by increasing the supply of oil.

He can easily do that by reversing his executive orders signed within days of taking office. The reversal would allow the Keystone Pipeline to be built, allow drilling on federal land, and reduce the difficulty in the permitting process. This would increase the supply and reduce the price of energy.

Biden can also stop the large inflationary increases in government spending. That would reduce total demand and put downward pressure on prices. He is not likely to do either, meaning prices won’t fall.

Biden will just have to continue to complain like the Cookie Monster does.

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