The Effects of Wal-Mart on Inflation

"Always low prices. Always." These are the four words that stand behind the world's second largest firms in terms of revenue, according to the Fortune 500 list of America's largest corporations for 2006. As Wal-Mart has grown vastly over the decades it has never strayed away from the vision on which it was founded, but this strong focus has caused many businesses and people to loathe the company. Although many individuals despise the Wal-Mart Corporation, it has helped everyone by keeping the cost of living under control. Inflation has ran ramped through the years, but Wal-Mart has found a way to stop the price level from rising over time, and in some cases, actually cause it to become lower than before. There are so many negative stories in the news about Wal-Mart that no one realizes the good that the company does for this nation and how efficient it helps business to be. What was once an uncontrollable force, Wal-Mart has mysteriously found a way to considerably lower the effects of inflation.

First, the question arises, what exactly is inflation? And should individuals be worried about it? Investopida.com states that inflation is "the rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling." Over time, prices will always fluctuate with the free market, meaning they will go up or down according to the laws of supply and demand. An equilibrium price is set when demand and supply are equal; this is the price that the market decides is fair and reasonable. As demand or supply increase or decrease against each other, it causes prices to either rise or fall. The cause of an increase in the cost of living is when demand increases, as all other variables are held constant, against supply. If this increase in the demand for items stays at higher rates than what is supplied, inflation is the outcome. Inflation is when these prices only move up at higher than normal rates for an extended period of time (Baumol & Blinder, 2006, p. 81). The problem with inflation is that it causes goods and services to rise substantially in price meaning that many people are made to suffer and live at a lower standard of living. Inflation has plagued the world throughout the centuries; the only problem is that inflation is a by-product of national economical growth.

Inflation has been the common enemy among men and money. Throughout the ages, it has slowly eroded the value of many currencies of the world to being nothing more than worthless. Men and women have been able to buy less and less amounts of goods and services than they were when just compared to a year ago. Inflation has become an economical problem that the government is trying to solve. The government uses two policies to attempt to prevent or control inflation: monetary policy and fiscal policy.

Everyone has heard about the FED lowering or raising rates, but not too many people realize what is really taking place. "Monetary policy refers to actions taken by the Federal Reserve to influence...demand by changing interest rates" (Baumol & Blinder, 2006, p. 382). As interest rates are lowered, the cost of money is cheaper and the supply of money increases, thus causing demand to increase and spur spending to grow the economy. With the growth comes the problem of increased inflation. When inflation is at too high of levels, interest rates are raised causing the cost of money to be more expensive and the money supply to shrink. This causes demand to subside and then eventually inflation will follow suit. The Federal Reserve will raise or lower the interest rates depending on the current situation of the economy. The economy needs to continue to grow but inflation has to be accounted for so the reserve takes slow incremental actions to insure a proper balance (Baumol & Blinder, 2006, 253). As one can clearly see, inflation is not pushed in one direction but fluctuates depending on the actions of the Federal Reserve with interest rates. Inflation is not stopped or contained by any means but over time is always increasing substantially upward.

"There are only two guarantees in life: death and taxes." Taxes are controlled through what is known as the fiscal policy by congress and "is its plan for spending and taxation. It can be used to steer...demand in the desired direction" (Baumol & Blinder, 2006, 381). The government can utilize this policy in many ways by increasing its spending, reducing taxes, and increasing transfer payments. The goal is to always grow the economy with as little inflation as possible. If the government spends more, it causes demand to grow and can then cause inflation to strike. If it decides to reduce taxes, then consumer spending will increase, as will demand, causing some more inflation. If the government decides to increase transfer payments, which are outright grants given to people even though they have not work for them, then consumer spending and demand will raise with yet again some more inflation. As the economy grows, the standard of living does also so the government tries to cause growth as much as possible, but with too much inflation, this growth and gain loses most of its effect. Most expansion causes inflation. As noted with the options the government has to exercise its fiscal policy, it is not will inflation strike but at what rate. The government is doing all that it can to stop inflation from going out of control but no matter what it does, price levels are always on the rise.

If the strongest and most powerful government on earth cannot stop inflation then who can? Step in Wal-Mart. Wal-Mart has always had a mission of delivering the lowest prices that it can to its customers. There are many ways that this company approaches this goal, either through demanding that suppliers lower their prices or by finding the cheapest supplier from which to buy. Wal-Mart is one of the most efficient corporations in the world and in a world that is full of scarce resources; it is an economist's dream. Wal-Mart has used its ability to become almost perfectly efficient to lower prices for consumers around the world. Charles Fishman (2006) tells a story in his book, The Wal-Mart Effect, about how deodorant used to come in a little cardboard box. Wal-Mart looked at all the cardboard that was simply thrown out and wasted. Not only was this waste making the amount of cardboard to be used in the future smaller, it was also wasting money. To Wal-Mart, this money would make the world more efficient if it were placed in the pocket of the purchaser (p. 1). According to Fishman (2006), every single box cost the consumer an extra five cents per container. Wal-Mart decided to do away with the cardboard coverings and told the suppliers to package the item without it. This ingenious decision saved an extra five cents that were otherwise being wasted. Wal-Mart brought down the cost of deodorant by five cents. The important part is what Wal-Mart did with those five cents that were saved. It allowed the supplier to keep half of the savings and passed the rest of the savings on to the consumer (p.2). Fishman (2006) stated:

With two hundred million adults in the United States, if you only account for the nickel on the container of deodorant in the medicine cabinet right now, that's a savings of $10 million, of which customers got to keep half, $5 million, just for one small change, unnoticed by consumers, more than a decade ago. (p. 2)
Not only did Wal-Mart deflate the price of deodorant, but it also passed half of those savings along to the customer. It did not keep the money for itself but gave it back to the people who needed it most, unlike most other companies that would have kept the savings as their own profits. Wal-Mart has always pressured its suppliers to become more efficient and with that efficiency has caused many extra expenses to be cut, which has lowered inflation by dropping the price level of goods. The company has used its power to help out the consumer who, at one time, was taken advantage of by big business. Wal-Mart not only stops inflation but it makes sure that the savings that it creates by its efforts get passed back to the customer.

At times, Wal-Mart can seem a bit demanding of its suppliers. In the previous story, it is easy to see why Wal-Mart had such a strong effect on efficiency and inflation because it eliminated a very unnecessary expense that was used on packaging. There are other times though that Wal-Mart uses its power to lower prices in ways that causes others to look negatively at the company. In a magazine article by Warren Cohen and Steve Knopper out of Rolling Stone (2004), Wal-Mart demanded that record label companies lower their prices on compact discs so that Wal-Mart could sell them for less than $10 a unit. This time Wal-Mart did not have an idea of how to accomplish this feat; it just wanted action to be taken in the direction of lower costs and prices. According to the article, Wal-Mart had been selling the CDs at prices under $10 per item, but it was buying them from the label companies for around $12 a piece. The corporation was doing this to draw people in to buy these albums and hopefully those people would also buy a compact disc player or some other product that related to listening to music. Apparently Wal-Mart had enough with the profit loss and decided the labels needed to find a way that Wal-Mart would stop losing money. Wal-Mart felt that charging prices over $10 was too expensive, which it saw as abuse towards the consumer. If the label companies did not find a way to lower their prices, Wal-Mart implied that they would cut their CD selection down and replace the area with DVDs and video games. The other two media categories were actually very profitable for Wal-Mart. This current battle between the two corporate sections continues with no real action taken by either side. The labels are keeping their prices where they were, and Wal-Mart is still selling some discs for a loss in profit. It shows how Wal-Mart is willing to go the extra mile because consumers want lower prices. The Wal-Mart Corporation is willing to take a small loss on its side in order to ensure that consumers do not pay too high of prices. Although these prices were also kept low for other promotional business motives, the fact of the matter is that the price for some CDs is staying at $10 and Wal-Mart is doing the best that it can to some day have all discs sell at this price. The company stays focused on its mission even though others have said that it cannot be done. It is fighting to control future inflated prices.

Wal-Mart is the second largest company in the world but could it be strong enough to influence the government? In an article entitled The Wal-Mart Effect out of the magazine The Atlantic Monthly, it was stated that the National Bureau of Economic Research says Wal-Mart has pushed inflation to much lower rates than can even be fathomed. When the U.S. inflation is measured, Wal-Mart is not even taken in as a factor. It is excluded because it tampers with the method that is used to measure inflation. It was stated "from 1998 to 2001 the government had overstated increases in food prices by 14 to 18.3 percent-meaning, in turn, that the Bureau of Labor and Statistics had overstated the nationwide inflation by about 15 percent a year" (Douthat, Littlefield, Poe, & M. Quirk. 2005). Wal-Mart has such a huge effect on inflation that a government agency cannot even measure the effect that Wal-Mart has had. It goes to show how Wal-Mart has revolutionized business, shopping, and the everyday interactions of everyone, including the government.

The baffling "Wal-Mart Effect" continues to affect lives today and well into the future because of how large Wal-Mart has become and the great power that it has amassed. There are so many negative stories in the news about Wal-Mart and some are rightly published. The problem is that Wal-Mart does not get enough credit for the good that it does. This company has used its influential buying power to stop an uncontrollable force identified as inflation, and not only that, but has passed the savings on to its customers. This firm has become the largest consumer advocate in the world. Many other corporations would have kept the savings as profit, but Wal-Mart gave it back to the people for which it fights. It is not being stated that actions taken by Wal-Mart in obtaining its core goal are supported or are good for society. There needs to be an understanding though that this company in a few short decades has found ways to become more efficient, grow and expand economically, and has also halted price levels from climbing. Something that even the government of the United States of America has had numerous troubles trying to accomplish for centuries. The nation needs to look to Wal-Mart as an example of how well organized the economy can become. The problem is that Wal-Mart and the people that it has spent years defending do not understand each other. There is a communicational gap that needs to be bridged. If Wal-Mart can find a way to over come the distance that it has with consumers and the government, the tools and model behind the second largest company in the world could make this nation even stronger than it has become on its own. Wal-Mart needs the American economy, and America needs Wal-Mart to be able to compete in the global economy that is here to stay. In a country that is filled with troubles and waste, maybe the only way to save it from itself is through a business model that has been supported by four simple words: "Always low prices. Always."

References

Baumol, W. J. & A. S. Blinder (2006). Macroeconomics: principles and policy. United States: Thomson South-Western.

Cohen, W. & S. Knopper (2004, October 28). Wal-mart battles labels over cd prices. Rolling Stone, (960), 26-30.

Douthat, R., N. Littlefield, M. Poe, & M. Quirk (2005, Jan/Feb). The wal-mart effect. Atlantic Monthly, 295(1), 56.

Fishman, C. (2006). The wal-mart effect: how the world's most powerful company really works--and how it's transforming the american economy. New York, New York:
Penguin Books.

Inflation. (n.d.). Investopedia.com. Retrieved March 27, 2007, from Dictionary.com website: http://dictionary.reference.com/browse/inflation