As the Dollar Dies, So Does the Dollar Menu

LvMIC:

It was only a matter of time.

Last month I highlighted a well run PR campaign against fast food giant McDonald’s over its use of a type of pink filler, otherwise known as ammonium hydroxide, in its burgers.  While I praised reality star Jamie Dimon for bringing this issue to light, I also showed how beef prices continue to rise amidst decades of dollar debasement

Ammonium hydroxide may look unpleasant but one should consider why McDonald’s would use such an ingredient in their products.  Take a look at beef prices in the U.S. over the past 20 years.  Though the chart is unable to be replicated here, the price of a pound of beef has increased from about $1.10 in 1992 to almost $1.90 today.  That’s almost a 75% increase!  Meanwhile, according to the inflation calculator at the U.S. Bureau of Labor Statistics, what cost $1.10 in 1992 now costs….$1.76!  Now of course economics is not a game of closed, static experimentation and correlation doesn’t always equal causation but certainly inflation has something to do with increased beef costs.

According to the latest Consumer Price Index summary released by the Bureau of Labor Statistics  food prices are up almost 4% compared to a year ago.  I continue in the post with an eerie prediction (my emphasis added):

Now it isn’t clear how long McDonald’s has been using beef filler in its hamburgers but one can float an educated guess and assume that doing such was done to offset an increase in the cost of beef.  With the abandonment of the filler, there is no telling how long the famous dollar menu will last.

Lo and behold from Fortune just a few days ago:

“McDonald’s new menu is about inflation more than value”

Later this month, McDonald’s will change some of its Dollar Menu items and it will begin offering an expanded value menu, including 20-piece chicken McNuggets, double cheeseburgers, chicken snack wraps, and Angus snack wraps, according to Reuters.
As we learned in a conversation with the company, McDonald’s is focusing its menu on four tiers (not including combo meals):

1. Premium: $4.50-$5.50+
2. Core: $3.50-$4.50
3. Extra Value Menu (new): $1.20 to $3.50+
4. Dollar menu

Given that McDonald’s is seeing increasing inflation in 2012, we believe the company is trying to manage its margins by forcing consumers to trade up to the “extra value menu” from the “dollar menu.” This makes more sense when we consider that one of the biggest changes is to remove small drinks and small fries from the dollar menu and replace those items with fresh baked cookies and ice cream cones.
From our perspective, the big problem is that the “Dollar Menu” has been around for a very long time. Inflation has made it an unprofitable but necessary evil.

As John Williams of ShadowStats has documented, how the government calculates the consumer price index changed fundamentally beginning in the 1990′s to underscore the true amount of inflation.  Originally a measure of the price fluctuations of a “fixed basket of goods,” the methodology assumed that consumers were not expected to substitute items increasing in price for those not seeing such a jump at the cash register.  The new reform in methodology championed by then-Federal Reserve chairman Alan Greenspan and President Bush’s (the first one) chief economist Michael Boskin takes into account changes of consumer choices.  Basically, if the price of chicken is going up, well, dog food should suffice as it may not be increasing at such a fast rate.  Therefore no inflation is measured.

The Boskin/Greenspan argument was that when steak got too expensive, the consumer would substitute hamburger for the steak, and that the inflation measure should reflect the costs tied to buying hamburger versus steak, instead of steak versus steak. Of course, replacing hamburger for steak in the calculations would reduce the inflation rate, but it represented the rate of inflation in terms of maintaining a declining standard of living. Cost of living was being replaced by the cost of survival.

To quell in advance any accusations of using an extreme example to demonstrate this underhanded and deceitful tactic, here is an excerpt from a paper put out by the Bureau of Labor Statistics to address the so-called myths of its measurement (or lack thereof) technique.

A simple, if extreme, example suffices to get the point across. Suppose that a person buys four candy bars each week: two chocolate bars and two peanut bars. The bars cost $1 each, so her total spending per week on candy bars is $4. Now suppose that, for some reason, the price of chocolate bars quadruples to $4, while peanut bars remain at $1. The goal of the CPI is to measure how much the consumer needs to spend each week to consider herself just as well off as she was before the price increase. A Laspeyres price index calculates the cost of the original purchase quantities: two candy bars of each type. Therefore, the answer according to the Laspeyres formula is that the consumer would need $10 to be as well off as before.

The authors proceed to justify the CPI calculation in attempting to establish some measure of utility of individual human preference.  But as Murray Rothbard points out in “Toward a Reconstruction of Utility and Welfare Economics,” such attempts are impossible:

Action is the result of choice among alternatives, and choice reflects values, that is, individual preferences among these alternatives.
Actual choice obviously cannot demonstrate any form of measurable utility”.

Leave it to government technocrats to assume themselves capable of measuring utility in a numerical fashion.  If the person cited in the BLS paper above spends $10 a week on candy bars, there is no way of gauging what kind of utility he/she derives from such an action.  All that can be observed is that the person prefers spending that $10 on candy bars rather than anything else.  As Rothbard writes “there is no such objective unit in the field of human valuation.”  Preferences can only be listed in an ordinal, ordered fashion.

Interestingly enough, McDonald’s is “replacing” fries and drinks on the dollar menu with cookies and ice cream.  How this change will effect the CPI won’t be known for some time but one can guess that the current BLS‘ methodology will not pick up on this clearly diminishing value.  Now a central banking proponent and CPI apologist could argue that this move by the fast food giant is negligible in the sphere of things as cookies can be considered as satisfying as french fries.  But again, such determinations assume utility is kept constant in lieu of purchasing less expensive items.

So as central banks around the world continue to print and prop up banking systems addicted to easy liquidity, instances such as these will be come more prevalent.  Like diminishing portion sizes at your favorite restaurant or the replacement of gold in computer chips with copper, stealth inflation will keep creeping into all aspects of life as Keynesians continue to point at the CPI and claim “look here, no inflation!”

So long dollar menu, we will miss you so.