Price Stickiness

  

Categories: Econ

They behave in step functions. Big pops...and big drops. That's how prices roll.

Think about the volatile oil biz. Prices go up...then there's a bomb scare in the Middle East or Argentina or Venezuela or Nigeria, and prices move. Fast. So prices suddenly run up to an average 4 bucks a gallon at the pump. Middle East peace breaks out all over the place. Do pump prices suddenly go back down?

Nope. They're sticky. They stick on top. Like...why would it be in the best interest of the gas station owners to suddenly adjust to their lower costs and prices. They stick up there, then slowly, gently fade, sticking to the higher prices, creating higher margins for the stations...until they fade back down to market rates again. Waiting and waiting for them to pop and stick again.

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of the items might go up while prices for others

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might go down even when everything moves in the same

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direction While the prices don't change at the same rate

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at all For instance in the past year the price

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two percent No big deal however Pickled kiwi rinds have

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nine cents an increase of nearly eight and a half

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percent Yeah much bigger deal Meanwhile the price of anima

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tube's actually fell during the year leaking or dipping to

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six dollars forty nine cents from six seventy four Well

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those air individual price levels But what about general price

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levels Will the general price level is a measure of

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prices across an entire system not just the direction of

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a price the direction of all prices You know general

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prices Right So this week all the items in your

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grocery cart cost you twenty dollars Two cents That's your

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general price level If you want to make an economic

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indicator out of it well call it your personal general

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price indicator or PGP I once you know the general

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price level while you contract overall price changes over time

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So a year ago the four items that you buy

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every week totaled nineteen dollars Forty two cents This year

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Twenty dollars two cents Your PGP I rose three point

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one percent from last year And there's a map new

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minus old overalls that you get that percent growth formula

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thinking well In real life he's general price levels are

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used to track inflation or deflation though well it doesn't

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happen all that often deflating things People like to rattle

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off inflation stats but it's actually a tricky thing to

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really track Honestly you're fairly er accurately in a complex

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economy prices for various products are moving in different directions

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all the time and a different rates all the time

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Combining all this action into a single stat well is

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extremely complicated There are a lot of competing indicators that

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measure the general price levels in the overall economy The

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most high profile of these is the Consumer Price index

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or CP I It works like the total price is

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for your weekly grocery basket except that the CP I

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includes a big basket like a basket with a representative

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sample off of all the stuff people by at least

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all the stuff that CPS measures And it's like thousands

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of things Your personal consumer price index may include just

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those four items that you buy every week You know

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the basket where one in four of the items are

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enema tube But the C P I R consumer price

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index is a lot broader thousands of items that people

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die all the time or in that index So yeah

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enema to prices make up well hopefully far less than 00:03:13.87 --> [endTime] twenty five percent of that index What

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