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jnikola Dec 16, 2022
Tools to make products and services cheap(er) again
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I recently visited my haircutter. As with many other things, he also raised the prices of his service. Then I thought, will his service become cheap again when the economy stabilizes?
The prices of commodities such as gas, oil, precious metals, grains, and others fluctuate. When their prices go tremendously up, the prices of products that rely on them grow. But, when the prices of commodities fall, the prices of final products do not. The same happens with inflation, raising costs of electric energy, etc.
How can we make sure that the prices of the final products or services, if raised, fall again and correct according to the prices of commodities or other fundamental factors they rely on?
How can we make them do that on a small (local community) or large scale (state)?
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Creative contributions
Denomination of the coin.
This happened in my country: when the communism felt we had a period of ridiculous inflation and we ended up with some weird prices: an egg costed 1000 LEU and a bicycle costed 15.000.000 LEU.
Then we made 1.000 (old) LEU = 1 (new) LEU. (1$= ~5 LEU)
Then the prices are resonable now: 1 egg = 1 LEU, 1 bicycle = 1500 LEU
The issue of a haircut costing a half you your monthly salary is fixed by the offer-demand duet.
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General comments
Shubhankar Kulkarnia year ago
Commodity prices mostly go up because fuel prices go up. Fuel is still the world's major energy source for transportation. An increase in commodity prices leads to an increase in salaries. When fuel prices go down, you cannot bring the salary down since based on the increased salary, a person might have got a loan to buy a house. If the salary goes down, they might not able to pay off the loan and run the house. This is a simplistic example. Moreover, the time factor plays a major role. For example, the fuel may rise by $5 in one day but it may come down by $1 per day. This means it will take 5 days for it to return to normal. You cannot keep changing the salaries daily because the employees would have no idea how much they will earn by the end of the month. This uncertainty will further boost the recession.
Also, what would you consider as the baseline to get back to? How would one decide a date that resembles the baseline? What are the fundamental factors mentioned in the session text?
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Shubhankar Kulkarnia year ago
J. Nikola I understand your point. The problem is not all raw material prices change at the same time and in the same proportion. For example, if milk price increased by 10% last year, it may not increase this year. However, that of vegetables might increase by 15%. In such a case, the inflation index would be an extrapolation if all raw materials are taken together. However, what you suggest would be an easier way out. We have the Consumer Price Index (CPI), which is "a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services." CPI could be calculated for each country or state averaging every quarter. Based on that, the salaries could be adjusted.
However, the question of whether to increase/ decrease salary in absolute amounts or percentages remains. This is important because the lifestyle of people in different income groups is different. Similarly, different brands sell the same product at different prices. Now, those who can afford to go for the costlier brand and those who can't, for the cheaper one. If we change the salaries in absolute amounts, we are indirectly suggesting that every person buys every product of the same quality (brand). Alternatively, if we use percent changes in salary proportional to the change in CPI, we maintain the consumer capacity to maintain their lifestyle. I brought this up for discussion to check whether I am missing any major parameter here. What do you think?
[1]https://www.bls.gov/cpi/#:~:text=The%20Consumer%20Price%20Index%20(CPI,of%20consumer%20goods%20and%20services.
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jnikolaa year ago
Shubhankar Kulkarni Thank you for your comment. As you correctly highlighted, salaries are the biggest problem in this story. When commodity prices go up, the prices of products, as well as salaries, go up. When commodity prices go down, it would be intuitive to reduce the prices of the products and services, but reducing salaries would make people very angry. Here we must find a way how to make it logical for people to accept the salary reduction according to the product price drop. It's important to note that salary changes are not proportional to product price changes. An increase or reduction in product price by 2 times usually means a change in salary of around 5-10% (unofficial data). Therefore, in the context of a 10% salary change, loans should not present a problem since they are never given above the amount that accounts for 1/3rd of your salary.
The timeframe of the product price and salary corrections (reductions) should be quarterly (every 3 months) or annual (every year), not on a daily basis. They should follow general economic trends. So, the baseline to get back to would be defined by the calculations based on the changes in the economy of the country on a quarterly/annual basis. Fundamental factors would be other energy sources such as electricity which is considered a relatively new type of commodity, or any other materials, components or living standards (which define the prices of human work per hour rate).
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Shubhankar Kulkarnia year ago
J. Nikola Could you please share the source of the unofficial data you mentioned? Which country does the data pertain to?
Okay, so you mean that in the model that you are proposing, salary change should be made proportional to the change in the prices of necessary products? For example, if milk increases by 10% (approximately 40 cents per gallon), and if an average person consumes about 1 gallon milk per month, the increase in milk expenditure would be 40 cents. Considering that there are a couple of dependables on an average earning person, the milk expenditure increases by about 120 cents per person who earns. So, in this case, should the salary increase by 120 cents? Or should there be a percent rise in the salary?
The idea of changing the salary quarterly seems reasonable. Fluctuations may happen multiple times a year and "every three months" seems like a logical timeframe.
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jnikolaa year ago
Shubhankar Kulkarni As I noted, it's unofficial data I got from talking to a friend who is an economist and I'm not sure to which country it refers. I tried to find info about this and it is a really complex and context-dependent topic, but you can check this source describing the wage-price spiral. I think it's about the UK.
I think the calculations you suggested make sense, but I would not focus on the price of one product, the same as I wouldn't focus on short-term price changes. Many products should be taken into account and similar calculations like the one you suggested should be done. However, I think it's already being done in the same or even in a more advanced way.
But I don't want you to focus on price increases or the proportionality of it in that context. I want you to think of a system where prices of the products and the salaries would rise and drop according to the current value of the "raw" materials or commodities (calculated quarterly or annually). The highlight is on DROP because prices increase automatically, but they never drop automatically. A good example is the gas price today in my country. The prices were extremely high 6 months ago and everything got more expensive since it relies on transportation, energy or gas as a raw material. Today, the prices of gas are 30-40 % less, but the prices of the products are not dropping. How to correct this?