Adjusted for inflation a Costco hot dog combo should currently cost $4.28. Instead it is $1.5, the same price it has been since 1985.
Costco isn't the only business who has chosen to keep prices stable against inflation, Arizona Iced Tea has been doing the same since 1992.
How do you calculate inflation adjusted hot dog prices
Here is the inflation recipe:
- Take the price of a Costco hot dog combo when it was first launched. That was $1.5 back in 1985.
- Take your favourite consumer price index at the time of the launch. That’s your price reference level.
- Apply the growth of this consumer price index (the inflation) to the original price of the hot dog. The result is the price adjusted for inflation.
To give an example, if in 1985 the consumer price index was at 100 and it is now at 200 then inflation over that period 2x prices. That means adjusting $1.5 for inflation a hot dog would now cost $3.
You have only one choice to make for this calculation: which consumer price index you choose to track inflation.
There are many of these that make sense to apply to a hot dog:
- The Consumer Price Index (CPI). This is the standard measure of inflation and the one used in our first chart.
- The sub-category of the CPI which contains only the food consumed away from home. That applies more specifically to a hot dog bought at Costco.
- The Personal Consumption Expenditure index (PCE) is another way of measuring inflation which is focusing on what consumers are actually buying (instead of an arbitrary basket of good for the CPI). This is also the preferred measure of inflation by the Federal Reserve.
- The food component of the PCE. Again this one applies more specifically to hot dog prices.
Let’s apply our recipe to calculate the effect of inflation on the Costco hot dog price with these four different indices.
As of today here is what a Costco hot dog would cost using different measures of inflation:
- $4.91 based on the food away from home component of the CPI.
- $4.28 based on the CPI.
- $3.82 based on the food component of the PCE.
- $3.63 based on the PCE.
That is the cost of a hot dog would be up between 142% and 227% since 1985 if Costco was passing down the cost to the consumer directly.
Check out the chart.
How does Costco manage to keep its hot dog price the same despite inflation
Because of inflation you would expect Costco to sell hot dogs for 3 times the price they actually charging. So how are they pulling this trick of charging only $1.5 for the past 30 years?
The first thing you’ll think about is that the hot dogs are a loss leader for Costco. That is they are selling the hot dogs at a loss to attract customers. It turns out that’s not the case.
The CEO of Costco, Craig Jelinek, explained that they do not have loss leaders and the way they have managed to control the cost of the hot dog combo is by taking control of the manufacturing of the hot dog themselves.
Back in 2009 Costco dropped its traditional hot dog supplies to build two hot dog manufacturing plants one in Los Angeles and one in Chicago. By doing that Costco gets better price on sausages and buns which keeps the cost of production low.
Over time they have also changed other parts of the combo while keeping the hot dog the same which also contributes to keeping the overall cost of the combo at $1.5.
All that to satisfy a request from James Sinegal, the founder of Costco, as he puts it (talking to Craig Jelinek):
“If you raise the price of the fucking hot dog, I will kill you. Figure it out.”
As Charlie Munger would say "show me the incentive and I will show the outcome"...
Now if you are an investor looking to protect yourself against inflation it might be tempting to stockpile loads of Costco hot dogs since they preserve their value so well… Unfortunately for obvious reasons that won’t cut it. But there are other options to preserve your wealth against the damages of inflation. For a review of the major asset classes how they fare against inflation go checkout our post with plenty of charts.
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