Sticker Shock Never Stops

By John Greenwald

If inflation is so low, why does everything cost so much ?

As she wheels her cart down supermarket aisles, Barbara Harris is stunned. "When people say that inflation has been checked," says the Los Angeles public relations consultant, "I listen in shock and disbelief. Just today I went across the street to get a loaf of bread, and it was $1.43. I was floored." Although Harris, 40, sticks to a tight budget and avoids stocking up on frills, the weekly grocery bill for her family of three has climbed from $80 to $100 in the past year. That 25% hike is nearly six times as great as the modest increase in the Consumer Price Index since September 1983.

Harris' plight is typical of the pain that rising prices still inflict on many shoppers despite a string of glowing Government reports showing that inflation has been tamed. Last week the Labor Department provided more relatively good numbers. It said the C.P.I. rose at a 4.2% rate during the twelve months that ended in September. In another encouraging move for the U.S. economy, many major U.S. banks lowered their prime lending rates, which had ranged up to 12 1/2%, to 12%.

Consumers, however, do not know inflation as a single abstract statistic. To them it is a hundred prices that hit them daily. Raymond DeVoe Jr., author of a Wall Street market letter, compiles an annual trivia index of items on sale within a few blocks of his Manhattan office. Included on his 46-point list is everything from a Broadway ticket (up 23% over the past two years) to a session at a podiatrist's office (25%) to a local telephone call (150%). Says DeVoe of his findings: "They represent another reason why so many people remain unconvinced that inflation is as low as the Bureau of Labor Statistics and the Administration contend."

Among those who doubt that inflation has fallen very far is Robin Friedman Rose, 32, owner of Via Dolce Confectioners in suburban Los Angeles, which makes Robin Rose ice cream. Her experience shows how people's views are shaped by the price hikes that affect them. Rose watched the wild black raspberries that give tang to her bestselling raspberry chocolate truffle flavor zoom from $31 per gal. to $107.50 per gal. after last year's harsh winter nearly destroyed the crop. To recover the extra cost, she tacks a 25-c- surcharge onto each scoop of the ice cream. Says Rose, a graduate of the University of Chicago Business School and a former student of Nobel-prizewinning Economist Milton Friedman: "I look at the inflation numbers and I laugh because I see my own costs going bonkers."

Others view price increases in a less lighthearted manner. They include people who scrimped through the severe 1981-82 recession and now find the cost of big-ticket items like housing, which has been climbing almost twice as fast as the C.P.I. since mid-1982, to be well beyond their reach. "They get a shock," says Haskel Benishay, professor of managerial economics at Northwestern University's Kellogg School of Management. "They're angry at not being as well off as they think they should be."

Nowhere are price hikes more ominous than in the supermarket. In Topeka, Kans., Schoolteachers Jeff and Chris Templin are grimly familiar with sticker shock at the grocery store. With three children in their family, the high food prices have forced them to cut back on other purchases to make ends meet. Says Jeff, 33: "We can't seem to keep food expenses as low as $60 or $70 a week, and that is without unnecessary sweets and with a lot of chopped beef on toast. We don't go out to eat very often any more, and we don't go to movies much. We budget more than ever."

Trips to clothing stores can also cause alarm. "I resent some of these prices," says Houston Antiques Dealer M.W. Spaights, 60, clutching a shopping bag with a new sports shirt inside. "I bought a shirt just like this last year for $17, and now they want $25." In Bellingham, Wash., Social Worker Mark Bronson, 34, and his wife Janice have two young children to clothe, and the price of even the smallest garments can make them wince. Says Janice, 29: "I saw a dress that I liked for my three-month-old daughter, but it was $34. This is ridiculous! I can buy a simple dress for myself for that. But she can only wear this tiny little dress three or four times, and then it goes into the garage-sale bag."

Such encounters with high prices can make consumers feel that they are standing still economically. Says Kevin Murphy, 36, an advertising copy editor who lives with his wife Barbara in Tamarac, Fla.: "I get a raise, and for a couple of months things seem more comfortable. Then inflation catches up with me. It's a treadmill." In Parma, Ohio, Lynda Smith, 37, a mother of two, agrees. The wife of an engineer for Ameritech, a regional phone company, she drives 30 miles round trip to stock up on canned goods at a discount grocery store. Says she: "Whenever my husband gets a raise, utilities, taxes or something else goes up. I don't think we're any better off in terms of buying power. We are about where we were five years ago."

To be sure, not everyone feels that he is struggling to stay even. Last year Will Connelly was named marketing director for a marine research firm in Fort Lauderdale, Fla., after being out of work for a year. Says Connelly, 54: "The rate of inflation is noticeably lower. That goes for food, gas and clothing. Our grocery bill has been stabilized at around $90 a week for the better part of a year." Connelly says his friends and acquaintances also feel that their situations have been improving.

There are a variety of reasons for the gap between the sharp price hikes that many people see and feel and the soothingly mild ones that the Government reports each month. One source of the disparity is the Consumer Price Index itself. Composed of a so-called market basket of goods and services ranging from haircuts to houses, the index measures the prices paid for average purchases by the average consumer. The trouble is that such people do not really exist. The C.P.I. assumes that shoppers spend 18.7% of their income on food, for example, without allowing for individual differences or special needs. Says Patrick Jackman, a Bureau of Labor Statistics economist: "The extent to which the C.P.I. accords with reality depends very much on one's spending patterns."

People vary widely in their habits and tastes. The September C.P.I. indicated that overall food and beverage prices had risen 3.9% over the level of September 1983. But that statistic obscured the details of what actually happened. While banana prices dropped 10.3%, last winter's citrus freeze pushed the cost of oranges 64.3% higher. And although egg prices fell 7.6% over the one-year period, poultry went up 6.3%. So people who prefer chicken salad to omelets are right when they feel that prices have been rising. Margarine lovers, meanwhile, were paying 14.4% more for their favorite spread. Those who got sick last month might also doubt that cost increases have slowed, since prescription drugs were 9.8% higher than they had been a year ago.

Looked at in detail, the September C.P.I. was a crazy quilt of rising and falling prices. Automobile tires were 5.9% cheaper than they were last year, but used-car prices were 11.7% higher. Medical-care expenses were up 6.1%, while wine prices were 1.7% lower. One of the biggest increases, 17.7%, was for private elementary and high school tuition. The cost of a new television set, on the other hand, was down 6.1%.

The inflation calculations also say nothing about why people will pay higher prices for some goods, particularly nonessential ones, but will shop for discounts on other items. Merchants know that sales of many luxury products are not very sensitive to price. If people want them, the cost may hardly matter. In fact, a higher price is sometimes considered an added attraction and a sign that the product is of higher quality. That helps explain why the cost of many top-of-the-line imports has stayed up despite the U.S. dollar's amazing surge against foreign currencies. The stronger dollar should have lowered the price of imports, but retailers have often not reduced them because they know that customers will still pay the higher prices. Even though the dollar has gained 15% against both the West German mark and the French franc over the past year, the prices of Mercedes-Benz and BMW autos from Germany and Yves Saint Laurent men's suits from France have remained unchanged.

Another reason that prices seem so high is that people have good memories. For anyone older than a baby boomer, a candy bar should cost a nickel, and it is painful to pay a half-dollar or more for one. Almost all the jump took place in past years, but the high cost does not go away.

The current rate of inflation is still unusually high by historic standards. Observes Art Broida, a fellow at Washington's American Enterprise Institute: "Inflation rates may be low in comparison with recent bouts of double-digit inflation, but they are still high historically, and people are feeling it." Broida points out that between 1800 and 1940 the U.S. cost of living was virtually stable. It was not until the Viet Nam War buildup of the mid-'60s and the energy shocks of the 1970s that prices began their continual rise. The increases were so novel that in 1971 a panicky Nixon Administration imposed the first peacetime controls on U.S. wages and prices. The annual inflation rate at the time: 4%.

Economist Herbert Stein, who was chairman of the Council of Economic Advisers under President Nixon, says that popular perceptions about higher prices defy any easy or clear explanation. Says he: "People's direct observations are suspect. They are unable to judge by their own experience what the rate of inflation really is because they don't buy things every month and don't follow the price movements closely." Stein recalls that during his White House years he tried to convince consumers that prices were not rising as fast as they thought. "I went to one particular group," he says, "armed with the prices of specific products, including green peppers, that had actually gone down. All I got, however, were protests from the group claiming that prices hadn't declined in their particular store."

And perhaps rightly so. While most people may not know or care about the price of a product somewhere else, or what the Government figures report, they are painfully aware of how much is coming out of their own purse or pocket. Reta Love, 60, a Hollywood, Fla., recreation department employee, has some blunt advice for Government statisticians: "I wish they'd go shopping."

--By John Greenwald.

Reported by Laura Meyers/Los Angeles and J. Madeleine Nash/Chicago

With reporting by Laura Meyers, J. MADELEINE NASH