Deflation! When smaller is better.

Well, sort of. You see, we’re not referring to commodity prices. We’re talking about consumer prices. Until now we have seen Wal-Mart, the nation’s largest retailer, cutting prices of goods from cereal to coffee (as much as 30% this year). But how?

[The following may also explain the miraculously low CPI reports over the past few months]

Here are some ways to cut costs:

Shrink the goods. Cereal boxes only two-thirds full, Hamburger Helper with denser pasta (allowing the same amount of food to fit into a 20% smaller box at the same price) and even repackaging (the 750ml bottle that was once 1000ml). This cuts resource costs.

Cut out the middleman. Wal-Mart now buys its brand-name coffee directly from a cooperative of Brazilian coffee farmers for its Sam’s Choice brand, cutting out suppliers, cooperatives, roasters. This cuts labor.

Go local. Stores are sourcing more produce locally instead of trucking to distribution centers nationwide. This cuts shipping costs.

Will it last? We don’t know but we are sure of one thing: There are many methods of getting great stuff for damn good prices, be it oil and metals (due to easy, cheap drilling), affordable housing and loans (due to low rates), stocks (due to high profit margins) or even labor (thanks to low-wage paying Asia).

But needless to say these days are passing us and they may be gone for quite a while. Rates are rising, easy oil is depleted, profits are declining, cheap labor is harder to find and those extra money saving efforts are dwindling… and so may the easy money.

For a nation seemingly addicted to Hummers, I think the retailers have begun to think differently: Smaller is better!

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