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Posts Tagged ‘prices’

What’s Next?

The economic climate remains uncertain and, as we enter 2017, we look towards a new President in the USA, challenging negotiations in the EU and continuing troubles for High Street stores. One such example is Next, a High Street retailer that has recently seen a significant fall in share price.

Prices of clothing and footwear increased in December for the first time in two years, according to the British Retail Consortium, and Next is just one company that will suffer from these pressures. This retail chain is well established, with over 500 stores in the UK and Eire. It has embraced the internet, launching its online shopping in 1999 and it trades with customers in over 70 countries. However, despite all of the positive actions, Next has seen its share price fall by nearly 12% and is forecasting profits in 2017 to be hit, with a lack of growth in earnings reducing consumer spending and thus hitting sales.

The sales trends for Next are reminiscent of many other stores, with in-store sales falling and online sales rising. In the days leading up to Christmas, in-store sales fell by 3.5%, while online sales increased by over 5%. However, this is not the only trend that this latest data suggests. It also indicates that consumer spending on clothing and footwear is falling, with consumers instead spending more money on technology and other forms of entertainment. Kirsty McGregor from Drapers magazine said:

“I think what we’re seeing there is an underlying move away from spending so much money on clothing and footwear. People seem to be spending more money on going out and on technology, things like that.”

Furthermore, with price inflation expected to rise in 2017, and possibly above wage inflation, spending power is likely to be hit and it is spending on those more luxury items that will be cut. With Next’s share price falling, the retail sector overall was also hit, with other companies seeing their share prices fall as well, although some, such as B&M, bucked the trend. However, the problems facing Next are similar to those facing other stores.

But for Next there is more bad news. It appears that the retail chain has simply been underperforming for some time. We have seen other stores facing similar issues, such as BHS and Marks & Spencer. Neil Wilson from ETX Capital said:

“The simple problem is that Next is underperforming the market … UK retail sales have held up in the months following the Brexit vote but Next has suffered. It’s been suffering for a while and needs a turnaround plan … The brand is struggling for relevancy, and risks going the way of Marks & Spencer on the clothing front, appealing to an ever-narrower customer base.”

Brand identity and targeting customers are becoming ever more important in a highly competitive High Street that is facing growing competition from online traders. Next is not the first company to suffer from this and will certainly not be the last as we enter what many see as one of the most economically uncertain years since the financial crisis.

Next’s gloomy 2017 forecast drags down fashion retail shares The Guardian, Sarah Butler and Julia Kollewe (4/1/17)
Next shares plummet after ‘difficult’ Christmas trading The Telegraph, Sam Dean (4/1/17)
Next warns 2017 profits could fall up to 14% as costs grow Sky News, James Sillars (4/1/17)
Next warns on outlook as sales fall BBC News (4/1/17)
Next chills clothing sector with cut to profit forecast Reuters, James Davey (4/1/17)
Next shares drop after warning of difficult winter Financial Times, Mark Vandevelde (22/10/15)

Questions

  1. With Next’s warning of a difficult winter, its share price fell. Using a diagram, explain why this happened.
  2. Why have shares in other retail companies also been affected following Next’s report on its profit forecast for 2017?
  3. Which factors have adversely affected Next’s performance over the past year? Are they the same as the factors that have affected Marks & Spencer?
  4. Next has seen a fall in profits. What is likely to have caused this?
  5. How competitive is the UK High Street? What type of market structure would you say that it fits into?
  6. With rising inflation expected, what will this mean for consumer spending? How might this affect economic growth?
  7. One of the factors affecting Next is higher import prices. Why have import prices increased and what will this mean for consumer spending and sales?
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China ‘shares’ its turmoil

The Chinese economy was, for some time, the beacon of the world economy, posting strong growth and giving a much needed boost to demand in other countries. However, the weakening Chinese economy is now causing serious concerns around the world and not least in China itself.

China’s stock market on Monday 11th January closed down 5.3%, with the Hong Kong Index down by 2.8%. These falls suggest a continuing downward trajectory this week, following the 10% decline on Chinese markets last week. Today, further falls were caused, at least in part, by uncertainty over the direction of the Chinese currency, the yuan. Volatility in the currency is expected to continue with ongoing depreciation pressures and adding to this is continuing concerns about deflation.

The barrage of bad news on key economic indicators may well mean significant intervention by Chinese authorities to try to avoid its slowest growth in 25 years. However, there are also concerns about China’s ability to manage its economic policy, given recent events. IG’s Angus Nicholson said:

“Global markets are still in the grips of China fears, and it is uncertain whether the Chinese government can do enough to reassure global investors.”

Similar sentiments were echoed by Paul Mackel, head of emerging markets FX research at HSBC:

“Different signals about foreign exchange policy have wrong-footed market participants and we are wary in believing that an immediate calmness will soon emerge.”

Perhaps key to turning this downward trend on its head, will be the Chinese consumers. With a traditionally larger saving ratio than many Western economies, it may be that this ‘cushion’ will give growth a boost, through the contribution of consumer spending. As we know, aggregate demand comprises consumption, investment, government spending and net exports (AD = C + I + G + XM). Consumer spending (C) increased from 50.2% in 2014 to 58.4% in 2015, according to HIS Global Insight. A similar increase for 2016 would certainly be welcome.

As oil prices continue to fall and concerns remain over China’s weak economic data, we may well soon begin to see just how interdependent the world has become. Many economists suggest that we are now closer to the start of the next recession than we are to the end of the last one and this latest turmoil on Chinese stock markets may do little to allay the fears that the world economy may once again be heading for a crash. The following articles consider the Chinese turmoil.

Free lunch: China’s weakest link Financial Times, Martin Sandbu (11/01/16)
China’s stocks start the week with sharp losses BBC News (11/01/16)
China shares fall 5% to hit-three-month low The Guardian (11/01/16)
China’s resilient shoppers face fresh test from market headwinds Bloomberg (11/01/16)
China shares head lower again on price data Sky News (11/01/16)
U.S., European shares slip as China, oil woes continue Reuters, Lewis Krauskopf (11/01/16)
U.S. stocks drop as oil tumbles again Wall Street Journal (11/01/16)
China escalates emergency stock market intervention The Telegraph, Mehreen Kahn (05/01/16)

Questions

  1. How are prices and values determined on the stock market?
  2. Share prices in China have been falling significantly since the start of 2016. Has it been caused by demand or supply-side factors? Use a demand and supply diagram to illustrate this.
  3. Why has the volatility of the Chinese currency added further downward pressure to Chinese stock markets?
  4. With the expected increase in consumer spending in China, how will this affect AD? Use a diagram to explain your answer and using this, outline what we might expect to happen to economic growth and unemployment in China.
  5. Why are there serious concerns about the weak level of inflation in China? Surely low prices are good for exports.
  6. Should the world economy be concerned if China’s economy does continue to slow?
  7. To what extent are oil prices an important factor in determining the future trajectory of the world economy?
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Your basket: ins and outs

The rate of inflation in the UK is measured using the Consumer Prices Index (CPI). This is made up of a basket of goods and the ONS updates this ‘basket’ each year to ensure it is representative of what the average UK household buys. The basket contains 703 items, with 110,000 individual prices collected each month.

In past years, items such as lip gloss have been added to the basket of goods, together with tablet computers and teenage fiction. In the recent update by the ONS, e-cigarettes have been added, together with specialist ‘craft’ beers and music streaming. On the other hand, other items have been removed, as the world changes. For example, during the recession, champagne was removed as an item that the representative household was no longer buying. In other cases, items are removed as they become outdated or obsolete with technology changing. This is the case with satellite navigation systems. As people turn to using their smartphones to navigate their way from A to B, satellite navigation systems are no longer seen as an item bought by the representative household.

The UK inflation rate is at an all-time low of 0.3% and there have been concerns that it may become negative, meaning we enter the world of deflation. However, if this does occur, many suggest that it is not bad deflation, as it is being driven by the extremely low oil prices. No matter what the inflation rate, the ONS will always continue to update the basket of goods that calculates inflation. It is therefore essential that these changes are made each year, as consumer buying habits do fluctuate considerably, as income changes, technology changes and general tastes change. The following articles consider what’s in and what’s out.

From craft beer to e-cigarettes, inflation basket reflects Britain’s changing shopping habits The Guardian, Katie Allen (17/3/15)
Inflation-measuring basket of goods adds protein powder, e-cigarettes The Grocer, Andrew Don (17/3/15)
E-cigareets and craft beers in updated inflation basket BBC News (17/3/15)
E-cigs added to inflation basket Mail Online (17/3/15)
Craft beer, e-cigarettes and protein shakes dded to price basket used to calculate inflation Independent, Hazel Sheffield (17/3/15)
U.K. hipsters and gym junkies win approval in new price basket Bloomberg, Tom Beardsworth (17/3/15)
Spotify in and sat navs out: take a look at the new inflation basket The Telegraph, Szu Ping Chan (17/3/15)
E-cigarettes, craft beer and Spotify enter UK inflation basket Reuters, Toby Melville (17/3/15)
Craft beer and e-cigarettes added to CPI basket Financial Times (17/3/15)

Questions

  1. What is the difference between the CPI and RPI? Which is usually higher? Explain your answer.
  2. Explain why champagne was removed from the basket of goods during the recession. What is sensible?
  3. How is the CPI calculated and hence how is inflation measured?
  4. Why has there been a movement towards chilled pizzas and away from frozen pizzas? Is the change likely to affect their relative price? Use a diagram to support your answer.
  5. What impact has technological progress had on the basket of goods that the representative household purchases? Do you think that technological progress make it more or less important for the basket of goods to be reviewed annually?
  6. Do you think products such as the iPad and e-cigarettes should be included in the CPI? Are they truly representative?
  7. In the BBC News article, you can access a list of the products that are ‘in and out’. Is there anything on there that you think should be in or that should be out? Be sure to justify your answer!
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House price variations: a regional story

House prices are always a good signal for the strength or direction of the economy. While there will always be certain areas that are more sought after than others and such differences will be reflected in relative house prices, the regional divide that we currently see in the UK is quite astonishing.

Prior to the financial crisis, house prices had been rising across the county, but in the year following the financial crisis, they declined by 19 per cent. It was only in 2013, when prices began to increase and, perhaps more importantly, when the variation in regional house prices began to increase significantly. In mid-2014, the UK’s annual house price inflation rate was 11.7 per cent, but the rates in London and the South East were 19.1 and 12.2 per cent, respectively. Elsewhere in the UK, the average rate was 7.9 per cent.

These regional differences have continued and figures show that the current differential between the cheapest and most expensive regional average house price is now over £350,000. In particular, data from the Land Registry shows that the average house price in London is £458,283, while in the North East, it is only £97,974.

Those people who own a house in London have benefited from such high house prices, in many cases finding that their equity in their house has grown significantly. Furthermore, any home-owners selling their house in London and moving elsewhere are benefiting from lower house prices outside London.

However, most first-time buyers looking for a house in London are being competed out of the market, finding themselves unable to gain a mortgage and deposit for the amount that they require. The opposite is, of course, happening in other parts of the country. First-time buyers are more able to enter the property market, but home-owners are finding that they have much less equity in their house.

This has also caused other problems, in particular in the labour market. Workers who are moving to jobs in London are finding the house price differentials problematic. Although wage rates are often higher in London than in other parts of the country, the house price differential is significantly bigger. This means that if someone is offered a job in London, they may find it impossible to find a house of similar size in London compared to where they had been. After all, an average family home in the North East can be purchased for under £100,000, whereas an average family home in London will cost almost £500,000.

The housing market is problematic because of particular characteristics.

Supply tends to be relatively fixed, as it can take a long time to build new houses and hence to boost supply. Furthermore, the UK has a relatively dense population, with limited available land, and so planning restrictions have to be kept quite tight, which is another reason why supply can be difficult to increase.

On the demand-side, we are seeing a change in demographics, with more single-person households; people living longer; second home purchases and many other factors. These things tend to push up demand and, with restricted supply, house prices rise. Furthermore, with certain areas being particularly sought after, perhaps due to greater job availability, ease of commuting, schools, etc., house price differentials can be significant.

The Conservatives, together with the other main parties, have promised to build more houses to help ease the problem, but this really is a long-run solution.

The Bank of England will undoubtedly have a role to play in the future of the housing market. The affordability of mortgages is very dependent on interest rate changes by the Bank’s Monetary Policy Committee.

Although house prices in London have recently fallen a little, the housing cost gap between living in London and other areas is unlikely to close by much as long as people continue to want to live in the capital. The following articles consider the housing market and its regional variations.

Articles
London’s homeowners have made £144,000 on average since 2009 International Business Times, Sean Martin (20/2/15)
Wide gap in regional house prices, Land Registry figures show BBC News, Kevin Peachey (27/2/15)
Mapped: 10 years of Britain’s house price boom (and bust) The Telegraph, Anna White (27/2/15)
Oxford houses less affordable than London Financial Times, Kate Allen (26/2/15)
January’s UK house prices show unexpected climb The Guardian (5/2/15)
House prices since 2008: best and worst regions The Telegraph, Tom Brooks-Pollock (22/8/14)
House prices hit new record high of £274k with six regions now past pre-crisis peak – but the North lags behind This is Money, Lee Boyce (14/10/14)

Data
House price indices: Data Tables ONS
Links to sites with data on UK house prices Economic Data freely available online, The Economics Network
Regional House Prices Q4 2014 Lloyds Banking Group

Questions

  1. What are the main factors that determine the demand for housing? In each case, explain what change would shift the demand curve for housing to the right or the left.
  2. Which factors determine supply? Which way will they shift the supply curve?
  3. Put the demand and supply for housing together and use that to explain the recent trends we have seen in house prices.
  4. Use your answers to question 1 – 3 to explain why house prices in London are so much higher than those in the North East of England.
  5. Why are interest rates such an important factor in the housing market?
  6. Explain the link between house prices and the labour market.
  7. Do you think government policy should focus on reducing regional variations in house prices? What types of policies could be used?
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The fate of the eurozone

The eurozone is certainly in trouble and, despite the efforts of world leaders to create confidence, it appears that most announcements are having the opposite effect. The risk of deflation has now emerged to be very true; the powerhouse of Europe ‘needs to do more’ and the euro has fallen following Mario Draghi’s recent comments. So, just how bad are things in the eurozone?

Mario Draghi suggested that as a means of stimulating the eurozone economies, a process of quantitative easing may soon need to begin. However, rather than reassuring investors that action was being taken to improve the economic performance in the region, it appears to have had the opposite effect. Following his comments, the euro fell to its lowest level since the middle of 2010.

Quantitative easing has seen much use in the aftermath of the financial crisis and the aim in the eurozone would be to put a stop to the continuing price decreases. The eurozone has now entered deflation and, while the aim of this economic area has always been low prices, deflation is not good news. The downward pressure on prices has been largely driven by oil prices falling and prices in other areas remaining relatively stable.

Quantitative easing would inject money into the eurozone, thus creating growth (or at least that’s the idea) and pushing up prices. One of Mario Draghi’s comments was:

‘We are making technical preparations to alter the size, pace and composition of our measures in early 2015.’

So, while it’s not certain that the QE policy will be used, it seems pretty likely, especially as this policy has been floating around for almost a year.

A key question is, will it work? The quantity theory of money does suggest that an increase in the money supply will lead to inflationary pressures, unless its velocity of circulation falls. But will it actually stimulate aggregate demand and economic growth? If there is more money in the banking system and hence more money available for lending then it may well stimulate investment and consumption. However, if consumers and firms are not confident about the effectiveness of the policy or about the future of the economy, then will the fact that more money is available for lending actually encourage them to borrow? In this case will there merely be a fall in the velocity of circulation?

The comments by Mario Draghi have also caused the euro to fall to its lowest level since 2010. The graph included in the CNBC article provides an interesting view of the path of the euro. Marc Chandler, from Brown Brothers Harriman said:

‘I’d say there’s a good chance it [the euro] gets there [parity with the dollar] before the election next November (2016) … We know the Fed’s going to be raising rates sooner or later, and the ECB is going to be easing sooner or later. I just see a steady grind lower.’

The outlook of the euro therefore doesn’t look too good by all accounts. It is now a waiting game to see if the policy of quantitative easing is implemented and whether or not it has the desired effect. The following articles consider this topic.

Eurozone economy slows further BBC News (6/1/15)
Eurozone falls into deflation for first time since October 2009 Financial Times, Claire Jones (7/1/15)
Eurozone officially falls into deflation, piling pressure on ECB The Telegraph, Marion Dakers (7/1/15)
Eurozone consumer prices fall for first time in five years Nasdaq, Brian Blackstone and Paul Hannon (7/1/15)
Draghi comments send euro to lowest level since 2010 BBC News (2/1/15)
Oil slump drags Eurozone into deflation The Guardian, Graeme Wearden (7/1/15)
Eurozone prices fall more than expected in December Reuters (7/1/15)
Eurozone lurches into deflation after oil price crashes Independent, Russell Lynch (7/1/15)
German inflation hits five-year low as Eurozone prepares for QE The Telegraph, Mehreen Khan (5/1/15)
Euro slide could take it to parity with dollar CNBC, Patti Domm (7/1/15)

Questions

  1. Why is deflation a cause for concern when normally the main problem is inflation that is too high?
  2. What is the quantity theory of money and how does it suggest an increase in the money supply will affect prices?
  3. If quantitative easing is implemented, is it likely to have the desired effect? Explain why or why not.
  4. Why has the euro been affected by Mario Draghi’s comments? Use a diagram to help your explanation.
  5. How will quantitative easing help to stimulate economic growth across the Eurozone? Are there any other policies that would be effective?
  6. Oil prices have had a big influence on the deflationary pressures in the Eurozone. If oil prices increased again, would this be sufficient to create inflation?
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Supermarket price wars and the effect on suppliers

The retail food industry is an oligopoly – a market dominated by a few big firms, with interdependence between them. This means that each firm considers the reaction of all its competitors when making any decision. Pricing is one of those key decisions and this is one of the reasons why price wars tend to break out in this industry.

For consumers, price wars are usually seen as a good thing, as it means prices in the supermarkets get forced downwards, thus reducing the cost of living. Low prices in this case are one of the key benefits of competition. However, there are costs of such fierce competition for suppliers. As final prices to customers are pushed down, small competitors are likely to feel the squeeze and may be forced out of the market. The other losers are suppliers. The big supermarkets are likely to pay lower prices to their suppliers, thus adversely affecting their livelihood. Research suggests that throughout 2014, 146 food producers entered insolvency, which is significantly higher than last year.

Accountancy firm, Moore Stephens, has blamed the supermarket price war for this rise in insolvencies in the food production sector. Duncan Swift from this firm said:

“The supermarkets are going through the bloodiest price war in nearly two decades and are using food producers as the cannon fodder…Supermarkets have engaged in questionable buying practices for years, but it’s getting worse and clearly wreaking havoc on the UK food production sector.”

The British Retail Consortium has said that placing the blame in this way was too simplistic. A commentator suggested that many suppliers have long-standing relationships with the supermarkets they deal with, suggesting that relations were good and sustainable. Furthermore, it was suggested that the demise of these producers may be due to many other factors and the data on insolvencies did not show that those firms affected were suppliers to the supermarkets. There is a Groceries Code Adjudicator in place to ensure that the supermarkets do not abuse their power when it comes to dealing with their suppliers, but the power of this person is limited, leaving suggestions remaining that suppliers are vulnerable. The following articles consider both the good and bad of price wars.

Supermarket price wars blamed for food producers folding BBC News (23/11/14)
Supermarket price war turns smaller food supplies into ‘cannon fodder’ The Guardian, Sarah Butler (24/11/14)
Supermarket price war now claiming food producers as victims The Telegraph, Peter Spence (24/11/14)
Supermarket price war is ‘killing off’ food producers as shops squeeze suppliers to cut prices at the checkout This is Money, Rachel Rickard Straus (24/11/14)
Supermarket price war killing British food producers International Business Times, Finbarr Bermingham (24/11/14)
Supermarket wars ‘failing’ food producers Sky News (24/11/14)

Questions

  1. What are the characteristics of an oligopoly? Why do price wars tend to break out in oligopolies, such as the supermarket industry?
  2. Apart from the supply-chain pressure from supermarkets, what other factors could have caused so many small food producers to become insolvent?
  3. How does the supermarket supply chain work and why have the price wars led to suppliers being squeezed?
  4. Use a diagram to illustrate the impact of the price war on (a) the supermarkets and (b) the suppliers.
  5. How important is the Groceries Code Adjudicator and should she be doing more to protect suppliers?
  6. If supermarkets are cutting prices, is this an indicator of unfair competition or good competition?
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Is Amazon a monopolist?

The market structure in which firms operate has important implications for prices, products, suppliers and profits. In competitive markets, we expect to see low prices, many firms competing with new innovations and firm behavior that is in, or at least not against the public interest. As a firm becomes dominant in a market, its behavior is likely to change and consumers and suppliers can be adversely affected. Is this the case with Amazon?

Much attention has been given to the dispute centering around Amazon and its actions in the market for e-books, where it holds close to two thirds of the market share. Critics of Amazon suggest that this is just one example of Amazon using its monopoly power to exploit consumers and suppliers, including the publishers and their authors. Although Amazon is not breaking any laws, there are suggestions that its behavior is ‘brutal’ and is taking advantage of consumers, suppliers and its workforce.

But rather than criticizing the actions of a monopolist like Amazon, should we instead be praising the company and its ability to compete other firms out of the market? One of the main reasons why consumers use Amazon to buy goods is that prices are cheap. So, in this respect, perhaps Amazon is not acting against consumers’ interests, as under a monopoly we typically expect low output and high prices, relative to a model of perfect competition. The question of the methods used to keep prices so low is another matter. Two conflicting views on Amazon can be seen from Annie Lowrey and Franklin Foer, who respectively said:

“Amazon relentlessly drives down prices for goods and services and delivers them fast and cheap. It ploughs its profits into price cuts and innovation rather than putting them in the hands of its investors. That benefits millions of families – full stop.”

“In effect, we’ve been thrust back 100 years to a time when the law was not up to the task of protecting the threats to democracy posed by monopoly; a time when the new nature of the corporation demanded a significant revision of government.”

So, with Amazon we have an interesting case of a monopolist, where many aspects of its behaviour fit exactly into the mould of the traditional monopolist. But, some of the outcomes we observe indicate a more competitive market. Paul Krugman has been relatively blunt in his opinion that Amazon’s dominance is bad for America. His comments are timely, given the recognition for Jean Tirole’s work in considering the problems faced when trying to regulate any firm that has significant market power. He has been awarded the Nobel Prize in Economics. I’ll leave you to decide where you place this company on the traditional spectrum of market structures, as you read the following articles.

Amazon: Monopoly or capitalist success story? BBC News, Kierran Petersen (14/10/14)
Why the Justice Department won’t go after Amazon, even though Paul Krugman thinks it’s hurting America Business Insider, Erin Fuchs (20/10/14)
Is Amazon a monopoly? The Week, Sergio Hernandez (19/11/14)
Big, bad Amazon The Economist (20/10/14)

Questions

  1. What are the typical characteristics of a monopoly? To what extent does Amazon fit into this market structure?
  2. Why does Paul Krugman suggest that Amazon is hurting America?
  3. How does Amazon’s behaviour with regard to (a) its suppliers and (b) its workers affect its profitability? Would it be able to behave in this way if it were a smaller company?
  4. Why is Amazon able to charge its customers such low prices? Why does it do this, given its market power?
  5. Is there an argument for more regulation of firms with such dominance in a market, as is the case with Amazon?
  6. The debate over e-books is ingoing. What is the argument for publishers to be able to set a minimum price? What is the argument against this?
  7. Should customers boycott Amazon in a protest over the alleged working conditions of Amazon factory employees?
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A cap on rail fares

Over the past few decades, numerous areas within the British economy have been partly or fully privatized and one such case is British Rail. Why is this relevant now? We’re once again looking at the potential increase in rail fares across the country and the impact this will have on commuters and households. So, have the promises of privatisation – namely lower fares – actually materialised?

Comparing the increase in rail fares with that of the RPI makes for interesting reading. Data obtained back in January 2013 shows that since 1995, when the last set of British Rail fares were published, the RPI has been 66%, according to data from Barry Doe and this compares unfavourably with the increase in a single ticket from London to Manchester which had increased by over 200%. However, it compares favourably with a season ticket, which had only increased by 65%. In the last couple of years, increased in rail fares have been capped by the government to increase by no more than the rate of inflation. As such, customers are likely to be somewhat insulated from the increases that were expected, which could have ranged between 3 and 5%.

This announcement has been met with mixed reviews, with many in support of such caps and the benefit this will bring to working households, including Passenger Focus, the rail customer watchdog. Its Passenger Director, David Sidebottom said:

The capping of rail fare rises by inflation will be welcome news to passengers in England, especially those who rely on the train for work, as will the ban on train companies increasing some fares by more than the average. It is something we have been pushing for, for several years now and we are pleased that the Government has recognised the need to act to relieve the burden on passengers.

However, others have criticised the increases in rail fares, given the cost of living crisis and the potential 9% pay rise for MPs. The acting General Secretary of the RMT transport union commented:

The announcement from George Osborne does not stack up to a freeze for millions of people whose incomes are stagnant due to years of austerity. To try and dress this up as benefiting working people is pure fraud on the part of the Government … Tomorrow, RMT will be out at stations across the north where some off-peak fares will double overnight.

Commuters in different parts of the country do face different prices and with some changes in peak travel times in the Northern part of the country, it is expected that some customers will see significant hikes in prices. Peak travel prices being higher is no surprise and there are justifiable reasons for this, but would such changes in peak times in the North have occurred had we still been under British Rail? Privatisation should bring more competition, lower prices and government revenue at the point of sale. Perhaps you might want to look in more detail at the actual to see whether or not you think the benefits of privatisation have actually emerged. The following articles consider the latest announcement regarding rail fares.

Rail fares to increase by 2.5% in January after Osborne caps price rises at no more than inflation Mail Online, Tom McTague (7/9/14)
Have train fares gone up or down since British Rail? BBC News, Tom Castella (22/1/13)
Rail fares to match inflation rate for another 12 months The Guardian (7/9/14)
Britain caps rail fares at inflation Reuters (7/9/14)
Regulated rail fares to increase by 3.5% in 2015 BBC News (19/8/14)
Northern commuters face big rise in fares for evening travel The Guardian, Gwyn Topham (7/9/14)
Commuter rail fares frozen again, says George Osborne BBC News (7/8/14)
Rail fares, the third payroll tax Financial Times, Jonathan Eley (22/8/14)

Questions

  1. What are the general advantages and disadvantages of privatisation, whether it is of British Rail or British Gas?
  2. Why is it that season tickets have increased by less than the RPI, but single tickets have increased by more?
  3. What are the conditions needed to allow train companies to charge a higher price at peak travel times?
  4. Are higher prices at peak times an example of price discrimination? Explain why or why not.
  5. In the Financial Times article, it is suggested that rail fares are like a payroll tax. What is a payroll tax and why are rail fares related to this? Does it suggest that the current method of setting rail fares is equitable?
  6. Based on the arguments contained in the articles, do you think the cap on rail fares is sufficient?
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Inflation is up: good news?

Rising inflation: not normally a cause for celebration, but that’s not the case for Japan. Having been subject to the spectre of deflation for many years, the 22-year high for the CPI at 2.7% is a welcome figure, even it is slightly lower than expected. This surge in prices is partly the result of a growth in domestic demand and a sign, therefore, that output will expand in response to the rise in demand.

The Japanese economy has experienced largely stagnant growth for two decades and a key cause has been falling prices. Although consumers like bargains, this has been problematic for this large economy. Deflation creates continuously falling prices and this means consumers hold back from purchasing durable goods, preferring to wait until prices have fallen further.

In the blog, Japan’s recovery, we looked at inflation data showing Japanese consumer prices growing at a faster rate than expected. This ‘positive’ trend has continued.

When it comes to inflation, expectations are crucial. If people think prices will rise in the future, they are more likely to buy now to get the lower price. This can therefore help to stimulate aggregate demand and it is this that has been the target for Japan. Part of the growth in the CPI is down to the sales tax rise from 5% to 8%. This was the first time in 17 years that the sales tax had increased. Further increases in it are expected in 2015. There were concerns about the impact of this rise, based on the depression that followed the last rise back in 1997, but so far the signs seem good.

Monetary easing was a key component in ending the downward trajectory of the Japanese economy and, following the sales tax rise, many believe that another round of monetary easing may be needed to counter the effects and create further growth in the economy and in the CPI. As the Bank of Japan Governor said:

There are various ways to adjust policy. We will decide what among these measures is appropriate depending on economic and price developments at the time … For now, we can say Japan is making steady progress toward achieving 2 per cent inflation.

One of the ‘three arrows‘ of the government’s policy has been to boost government spending, which should directly increase aggregate demand. Furthermore, with signs of the CPI rising, consumers may be encouraged to spend more, giving a much needed boost to consumption. The economy is certainly not out of the woods, but appears to be on the right path. The following articles consider the Japanese economy.

Japan CPI rises less than expected Wall Street Journal, Takashi Nakamichi (25/4/14)
Japan inflation may beat BOJ forecast Reuters, Leika Kihara (22/4/14)
Tokyo consumer price growth at 22-year high BBC News (25/4/14)
Japan inflation quickens to over 5-year high, output rebounds Reuters, Leika Kihara and Stanley White (31/1/14)
Japan’s consumer inflation set to reach five-year high Guardian (18/4/14)
Tokyo inflation hits 22-year high, inching toward BOJ goal Reuters, Tetsushi Kajimoto and Leika Kihara (25/4/14)
Tokyo’s core CPI got 2.7% lift in April from tax hike The Japan Times (25/4/14)
Is Japan winning the war against deflation? CNBC, Ansuya Harjani (25/4/14)

Questions

  1. Why is deflation a problem?
  2. Using an AD/AS diagram, illustrate the problem of expectations and how this contributes to stagnant growth.
  3. Use the same diagram to explain how expectations of rising prices can help to boost AD.
  4. Why is the sales tax expected to reduce growth?
  5. Why is another round of monetary easing expected?
  6. What government policies would you recommend to a government faced with stagnant growth and falling prices?
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The Big Six: for how much longer? (Elizabeth’s post)

The energy market is complex and is a prime example of an oligopoly: a few dominant firms in the market and interdependence between the suppliers. Over 95% of the market is supplied by the so-called ‘big six’ and collectively they generate 80% of the country’s electricity. There are two further large generators (Drax Power Limited and GDF Suez Energy UK), meaning the electricity generation is also an oligopoly.

This sector has seen media attention for some years, with criticisms about the high profits made by suppliers, the high prices they charge and the lack of competition. Numerous investigations have taken place by Ofgem, the energy market regulator, and the latest development builds on a simple concept that has been a known problem for decades: barriers to entry. It is very difficult for new firms to enter this market, in particular because of the vertically integrated nature of the big six. Not only are they the suppliers of the energy, but they are also the energy generators. It is therefore very difficult for new suppliers to enter the market and access the energy that is generated.

Ofgem’s new plans will aim to reduce the barriers to entry in the market and thus make it easier for new firms to enter and act as effective competitors. The big six energy generators are vertically integrated companies and thus effectively sell their energy to themselves, whereas other suppliers have to purchase their energy before they can sell it. The regulator’s plans aim to improve transparency by ensuring that wholesale power prices are published two years in advance, thus making it easier for smaller companies to buy energy and then re-sell it. Andrew Wright, the Chief Executive of Ofgem, said:

These reforms give independent suppliers, generators and new entrants to the market, both the visibility of prices, and [the] opportunities to trade, [that] they need to compete with the largest energy suppliers…Almost two million customers are with independent suppliers, and we expect these reforms to help these suppliers and any new entrants to grow.

Although such reforms will reduce the barriers to entry in the market and thus should aim to increase competition and hence benefit consumers, many argue that the reforms don’t go far enough and will have only minor effects on the competitiveness in the market. There are still calls for further reforms in the market and a more in-depth investigation to ensure that consumers are really getting the best deal. The following articles consider this ongoing saga and this highly complex market.

Ofgem ramps up scrutiny of Big six accounts Telegraph, Denise Roland (27/2/14)
Energy firms told to trade fairly with smaller rivals BBC News (26/2/14)
Energy regulator Ofgem force trading rules on ‘big six’ suppliers Financial Times, Andy Sharman (26/2/14)
Ed Davey calls on Ofgem to investigate energy firms’ gas profits The Guardian, Sean Farrell and Jennifer Rankin (10/2/14)
UK forces big power companies to reveal wholesale prices Reuters (26/2/14)
Watchdog unveils new rules on Big six energy prices Independent, Tom Bawden (26/2/14)
Energy Bills: New rules to boost competition Sky News, (26/2/14)

Questions

  1. What are the characteristics of an oligopoly?
  2. Explain the reason why the vertically integrated nature of the big six energy companies creates a barrier to the entry of new firms.
  3. What are the barriers to entry in (a) the electricity supply market and (b) the electricity generating market?
  4. What action has Ofgem suggested to increase competition in the market? How effective are the proposals likely to be/
  5. Why is there a concern about liquidity in the market?
  6. If barriers to entry are reduced, how will this affect competition in the market? How will consumers be affected?
  7. Why are there suggestions that Ofgem’s proposals don’t go far enough?
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