My Bagel Guy and Me

I live in New York's Upper West Side. Around here, everyone eats bagels for breakfast, lunch and dinner. Bagels are a core stapple. The best bagel shop in town, I believe, is located right near my home (now, I have no vested interest in pushing this place but it is on Amsterdam between 77th and 78th streets).

Last week, they raised their bagel prices from 70 cents to 80 cents, which follows a raise from 60 cents to 70 cents less than a year ago. In other words, over the last year, the Upper West Side's core stapple has increased in price by 33%.

Today, I asked the shop owner why he had raised his prices again. He explained to me that that he had to raise the price because flour cost had risen by 45% over the last year. He was trying to keep all other prices the same, but was also facing sharp wage pressure, increased health care premiums and insurance premiums, and the prices of all other inputs were going up as a result of increased fuel costs. Finally, he said that his margins on his business are less than they have been since he bought the business 10 years ago, and that he had no choice but to pass some of his increased costs on to the customers in order to stay in business.

The Fed focuses on core inflation, which strips out energy costs, rather than real inflation. It now claims that core inflation is in fact decelerating (increasing by less that 2%). New York is in many ways a world unto itself which prices unto itself, and it is possible that my bagels could increase in price by 33% without prices in New Jersey or Kansas being affect. But, after my discussion with the bagel store owner today, I simply cannot see how core inflation increases could possibly be so contained nationally with high gas prices (among other things) having significant follow-through costs nationwide. It seems to me clear, now more than ever, that the Treasury is tinkering with the numbers.

As a result, the entire Bernanke thing is very odd. Here is a Fed Chairman who has spent his tenure saying that his primary goal is to stomp out any signs of excessive inflation, yet he is focused on some clearly inaccurate indicators in saying that inflation has moderated. I now believe that Bernanke is under extreme pressure from Treasury and Commerce (and all of Wall Street) to lower rates before the end of the year in order to stop the credit crisis from spiraling out of control and to continue to prop up the housing bubble. I further believe that trying to stop the housing bubble from bursting at the expense of not fighting inflation will leave the US in a potentially very dire economic situation in about 2 years.

Bernanke needs to focus on the real problems with inflation and not be blinded by superficial inflation numbers. At the same time, our government also needs to allow the housing bubble to deflate (as many economists, including Yale's Robert Schiller, have pointed out that a country where people cannot afford housing at a rational price will ultimately become less competitive in a global economy).

In short, my 80 cent bagel leads me to believe that we are at a critical juncture here. In spite of the tough pill to swallow that lenders and homeowners may face while this thing deflates, Barnanke needs to keep his bias towards raising rates.