Schansberg: Five and Dime and Dollar and More
by Eric Schansberg, Ph.D.
Dollar Tree was in the news last month, announcing that its standard price will increase from a $1 to $1.25. It’s a sign of the times that “dollar” stores (including Family Dollar and Dollar General) are moving beyond a mere dollar to higher prices.
This isn’t a new phenomenon. Have you heard of “five-and-dime” stores? They were the “dollar stores” of their day, with common prices of a nickel and a dime. Woolworth’s was the original, but they’ve been gone for 25 years (transitioning into one of its later endeavors, Foot Locker). Ben Franklin is the only company remaining among the early versions of these stores. But we still remember Kresge and Walton’s, at least in their modern-day forms: Kmart and Walmart.
Why did prices rise from a nickel and a dime — to a dollar, and now beyond? Inflation: a sustained increase in the general price level throughout an economy. Low inflation has been the norm in modern economies. But high inflation was a problem in the 1970s and again now. Either way, the result is a depreciating currency — slowly at times and quicker at others.
Inflation always erodes the purchasing power of money, harming those with fixed incomes the most. Even worse: Uncertainty in inflation can be devastating to an economy, since it makes contractual arrangements risky. (If you agree to pay or accept dollars in the future, what will they be worth?)
It doesn’t require a Ph.D. in economics to understand the basics. Higher prices can come from an increase in demand or a decrease in supply. With higher demand, more money is chasing goods and services, putting upward pressure on prices. With lower supply, there are fewer goods and services, also encouraging higher prices.
Sometimes, this is caused by natural or economic forces. For example, a freeze in the orange crop would increase the price of oranges, orange juice, etc. But that’s not significant enough to impact inflation in the macroeconomy. In contrast, if you change the price of oil, this is big enough to ripple throughout the economy. Likewise, wide-ranging supply-chain problems during Covid have made it difficult for firms to get inputs and to ship their goods, increasing costs and prices.
Sometimes, it’s a result of large-scale government policy. Higher taxes and increased regulations drive up costs, putting pressure on prices. Policy responses to Covid-19 have also given us some good examples. Expanded unemployment insurance (paying people not to work) reduced labor supply — increasing wages, costs, and prices. And we’ve seen repeated government efforts to stimulate demand through massive cash payments and government spending.
Continuing inflation is not caused by sunspots or greedy businesses. (In competition, outside of cost problems, businesses find it exceedingly difficult to increase prices. And remember that inflation requires sustained price increases.) It’s caused by expansionary fiscal policy (as government spends too much money) or expansionary monetary policy (if the Federal Reserve allows too much money into the economy).
Here’s the bigger concern: Will we follow the pattern from the late 1970s as we fix our inflation problem? The result in the early 1980s was the worst economy we’ve had since the Great Depression — with double-digit unemployment rates. In other words, the buzz is not that great and the hang-over can be terrible. Worst of all: if fighting inflation leads to a recession, this will make it more difficult for the federal government to deal with its massive spending and debt problems. But that’s a different essay for a different day.
D. Eric Schansberg is Professor of Economics at Indiana University Southeast in New Albany.