Why does a Snickers bar cost $2.67?
It’s a simple question, but impossible to answer precisely. From the top down, we might say that the price is determined by the supply and demand for chocolate, peanuts, and caramel (balanced against the thousands of other tasty alternatives). From the bottom up, we could try to analyze some fifteen raw inputs, manufacturing, wholesale, and retail costs and profits, and the state’s rake.
But endless variables confound even the sharpest pencils — profit motives, productivity improvements, inventory overhangs and discounts, local costs, human preference and expectation, and the immeasurable elasticity of supply and demand. And yet, a Snickers bar has a price; $2.67 at my closest convenience. Last year it probably cost less, next year it will likely cost more.
In 2024, $457 million of Snickers were sold in the United States — roughly 0.002% of Gross Domestic Product (GDP).
This is the problem with inflation. Stable prices are critical to economic stability and a key mandate of monetary policy in a fiat world. But we don’t really know why prices change. The economy is simply too vast, interconnected, and complex to model with precision. Absent perfect models, the ultimate arbiter is observation.
Today, as the concerns about inflation and monetary policy have once again come to the fore, the market has turned to obsessive observation. This week, the market received December Producer Price Index (PPI) and Consumer Price Index (CPI) data — both showing increases in YoY readings from the prior month. These figures were instantly sliced into their smallest components and measured against expectations in basis points. Outliers are identified and discarded. In the end, there was collective agreement that the data was “Good” relative to expectations. Stocks and bonds rallied on the hopes that the Fed will continue to cut.
But maybe we are losing the plot — lost in the weeds of soy lecithin. The endless dissection of monthly numbers ignores root causes — monetary aggregates, cyclical and secular trends, fiscal policy. Even if we can’t translate these forces into precise price changes, perhaps they still provide predictive value.
After all, the surge of inflation from 2021-2022 was not random. It was driven by a rapid expansion in money (however defined), expanding credit (bank, non-bank, and sovereign), and purchasing power (via fiscal transfers), against a backdrop of labor shortages and supply disruptions (energy in particular)1.
Likewise, the rapid disinflation from 2022 - 2023 was not “immaculate” but driven by a confluence of strong disinflationary forces. Money aggregates shrank and asset prices declined. Interest rates rose and risk spreads widened. Credit and capital markets closed. Labor markets cooled. Goods prices declined. Energy prices fell as production returned to pre-pandemic levels.
Yet even today, prices climb faster than at almost any point in the prior decade, certainly faster than the Fed’s 2% inflation target. And as we look forward, there are signs that the disinflationary trend may be ending.
Money, Credit, Assets
The official policy story is that the current monetary stance is restrictive and further cuts are compatible with ongoing disinflation towards a 2% goal. Reality suggests otherwise.
There was indeed a point in which policy was restrictive and helped lower inflation from its peak. But those days are behind us. Many measures suggest the maximum impact of this tightening cycle occurred almost two years ago in early 2023. Since then, the credit and capital cycle has been in an upswing.