Value of a dollar grips our hearts

We’re all feeling the effects of inflation these days, in everything from the price of houses, cars and health care to college educations. Yet somehow, it’s the little things that stand out, and nowhere is the waning value of the dollar more obvious than in the shrinking range of products for sale at exactly $1.

For bargain shoppers coast to coast, snagging a dollar deal has always had a special magic. But with inflation on the rise during the pandemic, holding the line on the $1 price point is getting tougher for dollar stores, and, in many cases, consumers are being asked to pay more. Earlier this year, the Dollar Tree chain, where (unlike some other big chains with dollar in their name) nearly everything has sold for a buck, announced plans to jack up most of its assortment to $1.25. That’s a 25% increase, practically across the board.

The chain of discount variety stores explained that it’s battling not just the higher cost of goods, including freight and distribution, but also higher labor costs, as Dollar Tree, which has more than 15,000 storefronts across the nation, has been forced by the labor market to raise the hourly wages it typically pays to staff its outlets. The retailer says it’s confident that customers won’t push back against the $1.25 sticker price.

We’re not so sure.

There’s psychology at work in how consumers respond to inflation. The nightmare scenario for the U.S. Federal Reserve is a wageprice spiral, a continuous rise in prices where cost increases and wage increases follow each other up and up. We last experienced that in the 1970s, and many Americans alive today have no idea how painful it was: Buying power eroded, wages fell perpetually behind and hard-earned savings lost their value even when safely socked away.

The U.S. economy isn’t trapped in that cycle yet. Despite inflation running at 6.2% in the 12 months ending Oct. 31, growth and employment are solid and supply-chain pressures won’t last forever. Still, higher prices make the economy feel weaker than it is. In much the same way, buying a fast-food sandwich for $1.09 just doesn’t feel as satisfying as getting it for a buck off a dollar menu.

As the value of that buck continues shrinking, the Federal Reserve is taking notice. Next week, the Fed’s Open Market Committee meets to consider how to curb inflation that has hung around more stubbornly than its economists (and the administration of President Joe Biden in general) anticipated.

To boost the economic recovery from a pandemic-induced slump, the Fed had been buying $120 billion in assets each month. In November, it started tapering its bond purchases, planning to end them entirely in mid-2022. Faced with more evidence of rising prices, it could pull the plug months sooner. That in turn would set the stage for a string of interest rate hikes aimed at tamping down inflation.

For most Americans, the machinations of the Fed are one thing; the prices they pay represent something much more tangible. As Dollar Tree prepares to roll out its new $1.25 pricing, its customers at least can look forward to some new products and sizes that deliver better value for the extra money, such as groceries and frozen foods that have gotten too expensive for the chain to sell at $1.