Posts Tagged ‘prices’
“A commodity appears at first sight an extremely obvious, trivial thing. But its analysis brings out that it is a very strange thing”*…
Prices are on everyone’s minds these days. Brian Potter looks underneath the costs of the finished products and services that we typically track to examine the costs of the commodities that go into them…
This American Enterprise Institute chart [above], which breaks down price changes for different types of goods and services in the consumer price index, has by now become very widely known. A high-level takeaway from this chart is that labor-intensive services (education, healthcare) get more expensive in inflation-adjusted terms over time, while manufactured goods (TVs, toys, clothing) get less expensive over time.
But there are many types of goods that aren’t shown on this chart. One example is commodities: raw (or near-raw) materials mined or harvested from the earth. Commodities have many similarities with manufactured goods: they’re physical things that are produced (or extracted) using some sort of production technology (mining equipment, oil drilling equipment), and many of them will go through factory-like processing steps (oil refineries, blast furnaces). But commodities also seem distinct from manufactured goods. For one, because they’re often extracted from the earth, commodities can be subject to depletion dynamics: you run out of them at one location, and have to go find more somewhere else. In my book I talk about how iron ore used to be mined from places like Minnesota, but as the best deposits were mined out steel companies increasingly had to source their ore from overseas. And the idea of “Peak Oil” is based on the idea that society will use up the easily accessible oil, and be forced to obtain it from increasingly marginal, expensive-to-access locations.
(Some commodities, particularly agricultural commodities that can be repeatedly grown on a plot of land, don’t have the same sort of depletion dynamics, though bad farming practices can degrade a plot of land over time. Other commodities get naturally replenished over time, but can still get used up if the rate of extraction exceeds the rate of replenishment; non-farmed timber harvesting and non-farmed commercial fishing come to mind as examples.)
Going into this topic, I didn’t have a great sense of what price trends look like for commodities in general. Julian Simon famously won a 1980 bet with Paul Ehrlich that several raw materials — copper, chromium, nickel, tin, and tungsten — would be cheaper (in inflation-adjusted terms) after 10 years, not more expensive. But folks have pointed out that if the bet had been over a different 10-year window, Ehrlich would have won the bet.
To better understand how price tends to change for different commodities and raw materials, I looked at historical prices for over a hundred different commodities. Broadly, agricultural commodities tend to get cheaper over time, while fossil fuels have a slight tendency to get more expensive. Minerals (chemicals, metals, etc.) have a slight tendency towards getting cheaper, with a lot of variation — 15 minerals more than doubled in price over their respective time series. But this has shifted over the last few decades, and recently there’s been a greater tendency for commodities to rise in price…
[Potter offers a thorough– and fascinating– analysis, concluding…]
… historically commodities have generally fallen in price over time, but recently this trend has increasingly shifted towards rising prices. Natural gas and oil got cheaper until the 1950s and the 1970s, respectively, and since then have gotten more expensive. Beef and pork both got cheaper from 1970 until the 1990s, and since then have risen in price. Agricultural products were almost uniformly falling in price until around 2000, and have almost uniformly risen in price since then.
My general sense looking at historical commodity price data is that the more that production of some commodity looks like manufacturing — produced by a repetitive process that can be steadily improved and automated, from a supply that can be scaled up in a relatively straightforward fashion, without being subject to severe depletion dynamics — the more you’ll tend to see prices fall over time. The biggest decline in price of any commodity I looked at is industrial diamonds, which fell in price by 99.9% between 1900 and 2021d ue to advances in lab-grown diamonds production. This effectively replaced mined diamonds with manufactured ones for industrial uses; roughly 99% of industrial diamonds today are synthetic. Many other commodities had major price declines that were the result of production process improvements — aluminum got cheaper thanks to the invention (and subsequent improvements) of the Hall-Heroult smelting process, titanium’s price declined following the introduction of the Kroll process, and so on. (Steel also got much cheaper following the introduction of the Bessemer process, but that predates USGS price data.) And of course agriculture, which has evolved from crops being harvested manually to being harvested with highly automated, continuous process machinery, closely mirrors the sorts of process improvements we see in manufacturing.
Of course, this trend alone can’t explain changes in commodity prices over time, and there are plenty of commodities — steel, cement, silicon — that are produced in a manufacturing-type operation but which haven’t seen substantially declining prices over their history. And even commodities which resemble manufactured goods have risen in price recently. More generally, there are plenty of things that can shift supply and demand curves to the right or left: cartels, national policies, a spike or collapse in demand, and so on. But the question of “how much, over time, does the production of this commodity resemble a manufacturing process?” seems like a useful lens on understanding the dynamics of commodity prices…
“Do Commodities Get Cheaper Over Time?” from @constructionphysics.skystack.xyz.
* Karl Marx
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As we brush up on the basics, we might recall that this date in the anniversary of two events that spurred commodity consumption.
Alexander Graham Bell spurred a boom on copper consumption when, on this date in 1915, he placed the first transcontinental phone call, from New York to San Francisco, where the Panama–Pacific International Exposition celebrations were underway and his assistant, his assistant Thomas Augustus Watson stood by. Bell repeated his famous first telephonic words, “Mr. Watson, come here. I want you,” to which Watson this time replied “It will take me five days to get there now!” Bell’s call officially initiated AT&T’s transcontinental service.
And, on this date 45 years later, in 1959, the aluminum market got a boost when the first non-stop transcontinental commercial jet trip was made by an American Airlines Boeing 707, from Los Angeles to New York. The sleek silver plane made the flight in airline official time of 4 hours and 3 minutes, half the usual scheduled time for the prop-driven DC- 7Cs then in regular use on that route.
“Inflation hasn’t ruined everything. A dime can still be used as a screwdriver.”*…
As the recent election reminds us, inflation is a central issue to millions. How we calculate inflation has always been a subject of debate. And, as Carola Conches Binder explains, small changes that might seem trivial can lead to enormous changes in how well-off we think we are…
Every month, the US Bureau of Labor Statistics releases its newest data on the consumer price index (CPI). The CPI report is eagerly awaited by economists and policy wonks and investors. It garners heavy news coverage as a key piece of information in macroeconomic policymaking and analysis. The CPI and related measures affect monetary and fiscal policymaking and are often used to adjust Social Security payments, income tax brackets, and wages for millions of workers. Because of these far-reaching impacts, even relatively small changes in the measurement of the CPI can have major implications for households, firms, and the government’s budget. Thus, the technocratic task of measuring the price level is often at the center of political controversies. The evolution of inflation measurement in the United States has reflected both technical progress and these political forces.
The government’s role in the collection and publication of price indexes has been politically controversial from its origins, which were surprisingly late. Wesley Clair Mitchell, the former president of the American Economic Association, in 1921 called it:
a curious fact that men did not attempt to measure changes in the level of prices until after they had learned to measure such subtle things as the weight of the atmosphere, the velocity of sound, fluctuations of temperature, and the precession of the equinoxes . . . Perhaps disinclination on the part of ‘natural philosophers’ to soil their hands with such vulgar subjects as the prices of provisions was partly responsible for the delay…
[Binder recounts the history of price measurement, starting in Italy in the 18th century, explaining that economic and political pressures first resisted having indices at all, then struggled to shape them. She then compares the current approaches in use and unpacks the recent [and current] debate over whether we have inflation and if so, how much…]
… At the time of writing in 2024, inflation is falling by nearly any measure. But as Krugman’s super core episode [see here, here, and here] illustrates, the past few years have intensified public scrutiny of official price indexes and led to debates about their interpretations. In light of this scrutiny, it is important for national statistics agencies to maintain their credibility by adopting methodological improvements, learning from both the private sector and academic researchers, and communicating clearly with the public.
Just as the Bureau of Labor Statistics responded to the Stigler and Boskin Commissions by revising its methods, it has also responded to the Covid-19 pandemic and post-pandemic inflation. For example, the pandemic demonstrated that biennial (every other year) updates to the CPI expenditure weights are too infrequent in times of rapid economic changes. The pandemic very quickly shifted the types of goods and services that people were buying, so expenditure weights based on survey data from 2018 became out of date. People were spending more on food and other items facing large price increases, and less in categories experiencing falling prices, like transportation, implying that the official CPI measure was underestimating inflation.
The Bureau of Labor Statistics could not move quickly enough to change its estimates of expenditure weights, but private researchers could. The economist Alberto Cavallo used data collected from credit and debit card transactions to build his own set of weights that he used to construct a new Covid CPI measure, which indeed rose more quickly than the official CPI in the first months of the pandemic…
Cavallo’s experience constructing alternatives to official inflation statistics began when his home country, Argentina, began doctoring its inflation statistics in 2007 to hide inflation that rose above 12 percent in 2006 and likely averaged above 20 percent from 2007 to 2011. Cavallo and a group called the Billion Prices Project at MIT used web-scraping techniques to collect the prices of goods sold online in Argentina and four other Latin American countries. For all but Argentina, the price indexes based on online prices closely tracked official price indexes, but for Argentina, Cavallo’s estimates of inflation were three times higher than official estimates, and Cavallo’s estimates soon became more trusted than the official statistics.
Cavallo and the other researchers behind the Billion Prices Project have since extended their methodology to other countries, including the United States. In 2011, they started a private company called PriceStats that produces daily-frequency inflation measures for central banks and financial-sector customers in 25 countries, including the United States, using data on millions of product prices from hundreds of retailers.
In the United States, private inflation estimates may supplement the official estimates, but are unlikely to replace them. In part, this reflects the statistical agencies’ willingness to refine their methods, learn from private researchers, and maintain methodological transparency. For example, having learned that biennial expenditure weight updates are too infrequent, the BLS will update its expenditure weights every year beginning in 2023. The BLS also recently sponsored a study, Modernizing the Consumer Price Index for the 21st Century, to investigate additional improvements to the CPI that could be adopted in years to come. The study’s panelists considered a variety of innovations by Cavallo and other researchers, and recommended that the BLS experiment with using a wider variety of data sources, including online transactional data, to improve the timeliness and accuracy of its estimates.
The development of price and inflation measures has often been driven by political controversies, especially during times of war or during labor disputes. The development of the consumer price index arose from a need to ensure that wages and benefits would keep up with the cost of living. The recommendations of several different commissions have led to changes in how the index is computed – changes that have major impacts on the federal budget and on the distribution of resources. Especially in recent years, alternative inflation measures have proliferated. Overall, the official price indexes represent a tremendous intellectual and public achievement, despite the debates that continue to surround their use and interpretation…
Measuring price changes: “Where inflation comes from,” by @cconces in @WorksInProgMag.
(Image above: source)
* H. Jackson Brown Jr.
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As we muse on measurement, we might note that today marks the anniversary of another measurement regime that supplanted what had been a largely an informal (and often intuitive) understanding of a basic fact of life: on this date in 1883, precisely at noon, North American railroads switched to a new standard time system for rail operations, which they called Standard Railway Time (SRT). Almost immediately after being implemented, many American cities enacted ordinances adopting the standard, thus resulting in the creation of time “zones” in the U.S.– Eastern, Central, Mountain, and Pacific. Though tailored to the railroad companies’ train schedules, the new system was quickly adopted nationwide, forestalling federal intervention in civil time for more than thirty years, until 1918, when daylight saving time was introduced.
“Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair”*…
… or inflation is when you get less for the old price. Mark Dent on America’s most egregious case of shrinkflation– an investigation he began with a purchase from eBay…
… It’s everything I hoped for: a factory-sealed four-pack of regular Charmin Ultra toilet paper produced in 1992.
I look at the fine print and gasp…170 sheets per roll!
These days, a regular Charmin Ultra Soft roll, if you can find one, has 56 sheets. Even the roll they market as “Double” doesn’t have 170 sheets — it has 154. And the 1992 rolls are hardly the largest — the back of the package includes a note from parent company Procter & Gamble explaining these rolls have fewer sheets than a previous version.
Toilet paper is shrinkflation at its absolute worst. Imagine if Chipotle spent decades reducing the size of its burritos until they looked like tacos.
How far does the downsizing go? And why has the industry managed to make its products so small with barely any scrutiny?… I called Edgar Dworsky to help unroll the mystery of toilet paper shrinkage.
Dworsky, a Massachusetts-based consumer advocate who runs the consumer education websites Mouse Print* and Consumer World, is perhaps the only person in the US who reads the fine print, and he’s certainly the only one who’s consistently tracked changes to the sizes of products like cereal, snack chips, frozen pizza, and coffee mix, becoming the go-to shrinkflation source. As companies sought to avoid price hikes during the last couple of years and opted for shrinkflation, Dworsky’s decades-long work was profiled by the New York Times and praised by John Oliver.
When it comes to downsizing products, Dworsky tells me that toilet paper, along with paper towels, “probably come in first place.” And my 1992 toilet paper is just the tip of the iceberg…
[Dworsky helps Dent (and us) understand just how far shrinkflation has gone (e.g., a regular Charmin roll, 56 sheets today, had 650 sheets in 1974), why (the full range of) manufacturers are acting so aggressively (spoiler alert: it’s garden-variety greed, but also other forms of self-interest), and how they market less-for-more…]
… While it may seem deceptive to shrink toilet paper with little notice aside from the fine print — and to compare “Mega” and “Double” rolls to basically nonexistent products — it’s not against the law. Companies can shrink their product and charge the same amount, or more, while doing nothing to warn consumers aside from updating the fine print.
The new publicity around shrinkflation has at least caught the attention of legislators. Two new shrinkflation bills have been introduced this year. One would give the FTC power to punish shrinkflation and another would force companies to notify consumers when they shrink products while keeping the price the same. France enacted a similar law a few months ago.
Absent new protections, though, toilet paper will keep getting smaller and rebranded with deceptively larger names that actually contain less product. “There is no end,” Dworsky says.
He’s already spotted Charmin’s latest stunt: The company has swapped out “Super Mega” rolls for “Mega XL,” a rebrand with the same number of sheets. Dworsky suspects Charmin fears running out of descriptors and wants to save the mother of all superlatives, “Super Mega,” for the next time its shrinkage has gone too far.
“I mean, seriously, what can you do to Super Mega? Become Super Super Mega? Super Mega Plus?” he says.
The toilet paper companies will find a way. They always do…
“Why toilet paper keeps getting smaller and smaller,” from @mdent05 in @TheHustle.
* Sam Ewing
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As we compare, we might send carefully-calculated birthday greetings to two important economists, both born on this date in 1954:
Katharine G. Abraham, a professor at the University of Maryland, served as the commissioner of the Bureau of Labor Statistics from 1993–2001 and a member of the Council of Economic Advisers from 2011–2013. She laid the groundwork for the American Time Use Survey, and (germanely to the piece above) testified repeatedly before Congress on the shortcomings of existing methodology of the Consumer Price Index in the 1990s (and the necessity of making revisions based on objective research) and expanded coverage of the prices of services in the Producer Price Index.
Sanjiv M. Ravi Kanbur, T.H. Lee Professor of World Affairs, International Professor of Applied Economics, and Professor of Economics at Cornell University. worked for the World Bank for almost two decades and was the director of the World Development Report. In May 2000, Kanbur resigned as director and lead author of the World Development Report, following the publication of the initial draft of the 2000/2001 report on the internet. Kanbur’s resignation came a year after the resignation of the World Bank’s senior vice-president and chief economist, Joseph Stiglitz…
Kanbur’s initial draft argued that, “anti-poverty strategies must emphasise ’empowerment’ (increasing poor people’s capacity to influence state institutions and social norms) and security (minimising the consequences of economic shocks for the poorest) as well as opportunity (access to assets).” The final version of the report still contained the three central pillars of: (a) empowerment, (b) security and (c) opportunity, however the order was changed to (a) opportunity (with emphasis given to market-driven economic growth and liberalisation as ways of reducing poverty), (b) empowerment and, (c) security. The World Bank denied that US treasury secretary Larry Summers or anyone else had influenced the report to make it less radical…. (source)
“He, indeed, who gave fewest pledges to Fortune, has yet suffered her heaviest visitations”*…
As Zachary Crockett explains, taking the kids to a baseball game, a movie, or Disneyland is a bigger financial commitment than it used to be for middle-class families… a much bigger commitment…
In the 1950s and ’60s — the so-called Golden Age of American capitalism — family outings were within the realm of affordability for most median income earners. Many blue-collar workers could afford new homes and cars and still take their kids to Disneyland.
Despite rising wages, many of those same activities are now out of reach for everyday Americans.
The Hustle analyzed the cost of three family activities in 1960 vs. 2022:
1. A baseball game
2. A movie at a theater
3. A one-day Disneyland visit
We found that these family outings have increased in cost at 2-3x the rate of inflation — and that, in order to afford them, today’s American families have to work up to 2x as many hours as they did 60 years ago…
The painful details at: “America’s favorite family outings are increasingly out of reach,” from @zzcrockett in @TheHustle.
* John Maynard Keynes
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As we rethink our plans, we might recall that it was on this date in 1951 that Disney’s Alice in Wonderland had its American premiere (in New York, two days after premiering in London). The average price of a movie ticket that year was $0.47 (or $4.53, adjusted for inflation); popcorn was 5-10 cents per bag.
“It’s a recession when your neighbor loses his job; it’s a depression when you lose your own”*…
The “R word,” unpacked…
It’s being whispered and murmured about. The president is facing questions about it. Business leaders and investors are already bracing for it. The specter of recession is once again rearing its monstrous head.
It’s feasible that the economy could chug along without any bumps or crashes. But boom-and-bust cycles remain a seemingly inescapable feature of capitalist economies. Some countries have done well avoiding busts. Starting in 1991, Australia had a run of almost 29 years without a recession, the longest stretch of economic growth of any nation in modern history. That ended in 2020, when the pandemic led to a big contraction — and Australia (briefly) succumbed to the beast.
While Australia had zero recessions between 1991 and 2020, the United States had two, a mild one in 2001, amid the dotcom crash and the 9/11 terrorist attacks; and a catastrophic one known as the Great Recession, between 2007 and 2009. Since 1854, the first year for which we have official economic data, the United States has experienced 35 recessions.
The National Bureau of Economic Research’s Business Cycle Dating Committee is the official body that keeps track of recessions in the U.S. The committee has traditionally defined recessions as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”…
Recessions– what they are, what they aren’t, and how they happen: “Fear The Vibe Shift: Are We Entering A Recession?,” from Greg Rosalsky (@elliswonk) at Planet Money (@planetmoney).
And for a dive into the vibe in question, see Derek Thompson‘s (@DKThomp) examination of why many Americans believe that they’re personally doing well, even as they feel that the country and the economy are going to hell: “Everything Is Terrible, but I’m Fine.”
See also: “There are 2 very different kinds of recessions—and the U.S. is likely headed for something totally different than 2008” in @FortuneMagazine (source of the image above), and “A recession in America by 2024 looks likely– It should be mild—but fear its consequences” in @TheEconomist.
* Harry S. Truman
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As we batten the hatches, we might send carefully-considered birthday greetings to Robert Aumann; he was born on this date in 1930. An economist and mathematician, he is best known for his contributions to game theory, especially for his work on repeated games (situations in which players encounter the same situation over and over again). He developed the concept of correlated equilibrium in game theory, which is a type of equilibrium in non-cooperative games (like most of those in our economy), a more flexible version than the classical Nash equilibrium.
For these and related contributions to game theory, he shared the 2005 Nobel Prize in Economics.
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