EYE ON THE PIE: Beware cost increases you can't see

May 22, 2006

There I was at the grocery store engaged in economic research. I found a plasticwrapped pack of 24 half-liter bottles of "spring water" from a famous soft drink company was $4.99, or $1.57 per gallon. The store brand for "spring water," packaged in the same fashion, was $3.88, or $1.22 per gallon.

A 24-pack of regular or diet 12-ounce soft drinks from the same famous company was selling for $6.49, or $2.97 per gallon. That's just about the price of a gallon of gasoline.

A 24-pack of mountain-brewed tasteless 12-ounce beers was mine for just $15.99, or $7.33 per gallon. That's about 2-1/2 times the price of gasoline.

You've noted the essential issue: Without comparative pricing, we don't have any idea what we are paying. We maintain our excitement about gasoline prices, in part, because they are clearly marked and prominently displayed. It's almost impossible not to know how much you are paying for gas. An informed consumer is easily transformed into an irate consumer.

It is easy to pick up a jar of peanut butter or a bag of potato chips without any awareness of the unit prices or the trend of those prices. Prices for these items are displayed less boldly than the prices of gasoline. Ignorance of prices keeps consumers calm, particularly when price changes are moderate.

For example, that jar of peanut butter is priced at $1.74 per pound today, down 2.5 percent from 1996. Those potato chips, however, at $3.52 per pound, are up 15.9 percent in the past decade. These are moderate price movements compared with gasoline prices, which have climbed 16.3 percent in the past year alone and more than doubled in the past 10 years.

That increase in the price of gasoline has drawn headlines and intense speculation about who is responsible. Daily analyses by experts tell us everyone is to blame, from the irresponsible American consumer to the greedy international oil companies to ancient foes of James Bond. The problem is described as an increase in demand battling a decrease in supply with petroleum users caught in the squeeze.

No less important, although less discussed, are the rising prices of metals that are used extensively in manufactured products. "What? Manufactured products? Isn't manufacturing dead? Why are we talking about that?"

What do you think is being carried in all those trucks and rail cars we see moving across the land? Metals are critical parts of the electronic goods we buy, the construction we enjoy, our transportation, and the machines that process the food we eat. Rising wholesale metal prices can be transmitted through the economy just as rapidly as rising oil prices. Just because we, as consumers, don't see those prices rising does not mean they are unimportant.

In the past year, zinc has risen 136 percent in price. Over the same period, copper prices have gone up 89 percent and aluminum 39 percent. All these price increases exceed the rise in crude oil. But the president is not making any speeches about these price rises. Congress is not investigating and environmentalists are not moralizing.

Finally, there is the Starbucks effect: The retailer of addictive substances may have caused the price of coffee to rise 21 percent in the past year. As Starbucks has expanded its tea offerings, the price of tea also has gone up 21 percent. Maybe we should be expanding supplies of coffee and tea while encouraging people to cut back their caffeine consumption.

Or should we do something radical? We could recognize price movements as natural responses to our changing preferences and circumstances. Most important, we will respond to price movements efficiently if the market is allowed to function appropriately.



Marcus taught economics more than 30 years at Indiana University and is the former director of IU's Business Research Center. His column appears weekly. To comment on this column, send e-mail to mortonjmarcus@yahoo.com.
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