PeakTrader.com

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PeakTrader said...

Consumer behavior has a significant impact on inflation.

When the price of a good rises relative to a similar good, consumers tend to substitute the lower priced good for the higher priced good.

So, the actual inflation rate is lower than what a static model would show.

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morganovich said...

peak-

"When the price of a good rises relative to a similar good, consumers tend to substitute the lower priced good for the higher priced good. "

no. this is precisely the wrongheaded rationale that makes CPI understate inflation.

if consumers shift away from a higher priced good and to a lower priced one, the price of the former should drop and the latter should rise.

thus, all of that signal is already contained in price.

it also assumes that all price changes are driven by supply, an wildly inaccurate notion.

if the atkins diet gains popularity, the price of meat increases and the price of pasta drops (as actually happened) but, far from encouraging consumers to eat more spaghetti, it is rather a reflection of the fact that they are eating less. thus, overwighting it in a hypothetical consumption basket is 180 degrees wrong. the whole reason it got cheaper is that demand dropped for a reason not related to price.

you don't substitute bell bottom jeans for straight leg because they are cheaper, they are cheap because they went out of style.

so, as you say, consumer behavior has a big effect on price, but more often that not, price increases are due to demand going up or down and as such, quantity consumed adjusts in the opposite direction of what you propose.

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PeakTrader said...

Morganovich says: "If consumers shift away from a higher priced good and to a lower priced one, the price of the former should drop and the latter should rise."

If or until that happens, consumers are actually buying goods at lower prices.

There are many factors that lower prices, e.g. increased productivity, lower costs, more trade, etc.

Competition often results not only in lower prices, but depressed prices.

Also, your examples of Atkins diet and bell bottom jeans have more to do with quality perceptions and discontinued goods than normal consumer behavior.

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Ron H. said...

Peak

"Also, your examples of Atkins diet and bell bottom jeans have more to do with quality perceptions and discontinued goods than normal consumer behavior."

What exactly IS normal consumer behavior? Those two examples seem typical of behavioral changes that happen continually.

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PeakTrader said...

Ron, "typical" consumer behavior is when you see a bargain, you're more likely to buy, and when you see a great bargain, you're more likely to stock-up, given your budget constraint.