Matt Nolan

Progressive puts the squeeze on wholesalers: What does this mean for consumers?

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Normally, when we hear that a supermarket is putting the screws on its suppliers it is a good thing for consumers. When supermarkets get better prices for wholesale products, some of those savings will be passed on to consumers!

However, this case of squeezing the wholesaler does not appear as consumer friendly. Progressives are telling wholesalers that there product cannot be “promoted” by other store types at the same type that Progressive is promoting it. If they the wholesaler breaches this “no-clash” agreement, then they are liable for the cost associated with Progressives lowering the price to meet competitors.

Now how could this lead to lower competition? Read more

Matt Nolan

The paradox of petrol prices and inflation

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Explain this to me. According to some New Zealand retail banks:

If petrol prices increases, it will slow the economy, which will reduce inflationary pressures, and this will allow the Reserve Bank to cut interest rates.

If the petrol price falls, imported costs are lower, which will reduce inflationary pressures, and this will allow the Reserve Bank to cut interest rates.

Why are some people willing to take contradictory pieces of information as proof of their own fabricated story – this disappoints me. Come-on guys, lets be less reactive and lets use our awesome tools to give New Zealander’s better information!
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Matt Nolan

Why has the price of oil fallen so sharply?

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Over the last three days the price of oil has fallen by nearly 10%. Given the sudden nature of this change it seems impractical to state that it is fundamental supply and demand factors driving the shift in prices.

Tyler Cowen at Marginal Revolution states two reasons why we might get such significant changes to the current price, even if contemporaneous supply and demand conditions have not changed – both explanations avoid implying that there has been a “speculative bubble” in oil (where a speculative bubble would occur when traders have been holding inventories, which they have not been – however this does not rule out a general bubble, where future price expectations are out of whack). These reasons are: Read more

Matt Nolan

“When the going gets tough, central banks hope for a miracle”

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Great article here: (ht Bayesian Heresy)

http://blogs.ft.com/maverecon/2008/07/when-the-going-gets-tough-central-banks-hope-for-a-miracle/

Key points for me were about the “dual supply shock”:

  1. Don’t react to the relative price movement – react to it’s impact on inflation expectations,
  2. Recognise that this relative price movement implies a lower potential rate of output when looking at your output gap (*).

I think we sometimes forget about the second point – but it is very important given what is currently going on in the world.

Matt Nolan

Is the business sector in retreat: An alternative view

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Business and consumer confidence is at concerning low levels. Furthermore, there is now a general consensus that we are in a recession.

However, something feels strange. A boost in petrol prices and a drought are the factors smashing our economy – the drought is temporary and people seem to be responding strongly to the change in fuel prices.

In fact, the value of fuel sales only rose 0.1% over the three months to May, while the price of petrol rose 7.3% and diesel rose 16.2% (thank you MED and Stats). The more that people can substitute away from the use of fuel, the less impact it has on their spending power.

But our focus here isn’t households, its businesses. The rising fuel, energy, labour, and other input costs must be tightening their margins. With consumer spending languishing, there must be blood on the wall – right? I currently feel that it is looking this way, but I’m going to put down a more positive alternative point of view anyway 🙂

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Matt Nolan

Diminishing marginal utility of income and “big ticket” items

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One of the main justifications for redistribution policies is “diminishing marginal utility”. We have already discussed that this doesn’t really make sense as we can’t compare peoples “utility”. For example, people that receive higher utility from consumption will work more and thereby will earn a higher income – from here we cannot tell whether the change in welfare from taking a dollar off them and giving it to someone who earns less will be positive or negative.

Furthermore we have the fact that two people with the same lifetime income level the person with a more variable annual income will be taxed more than people who do not have a variable income – implying that DMU does not work as a defense here!

However, there is a further complication to the DMU story. Even if everyone has the same “utility function” we cannot necessarily assume that marginal utility will be diminishing in income.

Why? Well because of the cost of “big ticket” items and the increased use of services like Clever Shop List to pay for them. Read more