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What The Tooth Fairy Tells Us About The Rising Cost Of Parenting | Planet Money | NPR

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Instructions:  View instructions on the section padlet.

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Instructions:  View instructions on the section padlet.

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Team:  Students will do one chapter per section.  View your assigned padlet at this link.

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Team:  Students will do one chapter per section.  View your assigned padlet at this link.

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I made this table to organize the information in a way I can remember.

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This chapter is all about Elasticity. A key formula to know is:

price elasticity = quantity / price

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Here is a helpful table that organizes all the different types of elasticities.

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Difference divided by average times 100.
Remember the percent change in quantity is on the top of all the elasticity ratios.

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Although this is a couple years old, it shows that demand for clothing is more price elastic than demand for gasoline. It is also interesting to see the difference between Canada and the US.

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Gasoline and Apparel at Opposite Ends of Elasticity Equation

An interesting sidebar to the coronavirus story has been seeing how elastic prices are to dramatic shifts in retail sales and other high-profile categories of economic activity (e.g., in the travel sector). Wider than usual percentage changes have made relationships more apparent.

For July 2020, the U.S. 'All-items' Consumer Price Index was +1.0% year over year, with the 'core' rate of increase at +1.6%. (The 'core' rate eliminates items in the CPI 'basket' that have a history of extreme volatility, mainly in the energy and food spheres.)

It's in specific consumer product categories, however, where the most fascinating results are to be found.

For starters, the retail sales of gasoline stations in July were -15.6% year over year (Graph 1). Much of the explanation lies in the fact the price of petrol in America in the same month was -20.3% y/y (Graph 2).

In the case of gasoline, the price, ‒ which is determined externally based on global demand for oil, ‒ is determining gasoline station receipts. More often, the relationship is the other way around.

For example, among all major shopkeeper categories, the sales of 'clothing and accessory stores' have been performing worst, -20.9% y/y in July. (In June, they had been -23.2% and in May, -63.4%). Therefore, it's no surprise that the 'apparel' sub-index of the CPI in July was -6.5% y/y. In this instance, it's the sharp drop in the sales volume that is setting the price. Discounts are being offered in the hopes of driving more sales.

'Women's dresses' in the July CPI were -23.1% y/y and 'men's suits, sport coats and outerwear', -12.8% y/y. The need to look sharp has been diminished by the 'work from home' pandemic response.

Food and Beverage Consumption and Prices

There is a similar mapping, but in the opposite direction, to be found between food and beverage consumption and their price changes as captured in the CPI survey.

In July, 'food and beverage store' sales in the U.S. were +11.1% y/y. Also, they had been +12.4% in June and +14.5% in May.

Stocking up to ensure cupboards don't run bare has permitted some larger than normal price increases. The 'food at home' sub-index of the CPI in July was +4.6% y/y.

Moreover, some of the largest price changes have come within the 'comfort food' designation: carbonated drinks, +9.2% y/y; 'frankfurters' (hot dogs), +15.7% y/y; 'uncooked ground beef' (hamburgers), +15.0%; and 'snacks', +6.0%. (As to what's in the 'snacks' category, that remains a mystery. It's not specified in the CPI report. Maybe we don't really want to know.)

The price for 'household paper products' (tissues, toilet paper, etc.) sold in grocery stores in July was +10.3% y/y.

Graph 1: U.S. Retail & Food Services Sales Y/Y ‒ July, 2020

'Current' dollars means not adjusted for inflation. Underlying numbers are seasonally adjusted & not 'smoothed'.

Data Source: U.S. Census Bureau.
Chart: ConstructConnect.

Graph 2: U.S. Inflation: All Items (CPI-U) vs All Items Less Food & Energy (i.e., 'Core'*)
(Not Seasonally Adjusted)

The latest data points are for July 2020.
The U.S. figure (CPI-U) is the All Items Consumer Price Index for All Urban Consumers.
*Core inflation is CPI-U less its often most volatile sub-components, food and energy.

Data source: U.S. Bureau of Labor Statistics (Department of Labor).
Chart: ConstructConnect.

Revenues and Pricing in the Travel Sector, U.S. and Canada

Price changes are identifying where, among sectors, activity levels are chugging along nicely (grocery store sales) or are in the most distress (the travel and accommodation industries).

Due to the world-wide coronavirus outbreak, travel to all corners of the globe has been drastically curtailed. Airlines have been cutting staff, placing pilots on furlough and scrambling (and often failing) to save routes.

With fewer business and tourism travelers, hotel and motel room occupancy rates have fallen to previously unheard-of lows.

Airline and accommodation sector earnings have dropped off alarmingly. Old pricing levels have proven unsustainable.

According to the latest CPI report, 'airline fares' in the U.S. in July were -23.7% y/y. Also, the 'lodging away from home' (i.e., hotel and motel room rates) sub-index was -15.3% y/y.

North of the border, Canada's July CPI results featured the first year-over-year decline (-8.6%) in 'air transport' prices since December 2015, when the cost of jet fuel took a dive.

Canada's sub-index for 'traveler accommodation' in July was -27.0% y/y.

Some Other Notable U.S. Price Changes

The following, in bullet form, are some other notable U.S. year-over-year price changes as set out in July's CPI report.

'Health insurance', +18.7%. This big jump, given the more precarious nature of today's medical services capacity, should come as a surprise to no-one.

'Haircuts and other personal care services', +6.5%. Considerable pent-up demand accumulated in the spring while so many Americans were not venturing out of their homes.

'Sports vehicles, including bicycles', +6.2%. In shopping terms, there's been a run on bicycles as an excuse to go outdoors and stretch one's muscles. Also, a bicycle may make it possible to avoid the infection perils of public transit.

'Photographic equipment and supplies', +5.3%. This year's stay-at-home summer has prompted a search for, or an expansion of, hobby outlets.

'Jewelry', -5.6%. With jobs uncertainty comes a cutback in discretionary spending. At the same time, though, the price of gold has been going through the roof.

'Televisions', -13.8%. Increasing numbers of people (and especially young people) play games or watch their favorite programming on smart phones or laptops.

Canada's Price-Change Ties to Activity Levels Not as Pronounced as in U.S.

Canada's 'All-items' CPI performance was barely elevated year-over-year in July, at just +0.1%, according to Statistics Canada. The country's 'core' rate of inflation was +0.5%.

Canada's price-change ties to activity levels have not been as pronounced as in the U.S. (When, some years from now, academics come to study this phenomenon during COVID-19 days, they'll do better to look at the U.S. data than the Canadian.)

While Canadian 'clothing and accessory' retail sales in June were -21.7% y/y, after being -67.6% in May, the CPI sub-index change for 'women's clothing' in July was a restrained -2.8% y/y, and for 'men's clothing', -3.0% y/y.

Canadian 'food and beverage store' retail sales in June were +11.8% y/y (quite close to the U.S. experience), but the 'food purchased from stores' CPI sub-index was ahead by only +2.4% y/y.

Gasoline was the exception. 'Gasoline station' sales in Canada were -19.6% y/y in July, in keeping with the -14.9% y/y change in price.

Graph 3: Canada Retail Sales Y/Y - June 2020

"Current dollars' means not adjusted for inflation. Underlying numbers are seasonally adjusted & not 'smoothed'.

Data source: Statistics Canada.
Chart: ConstructConnect.

Graph 4: Canada Inflation: All Items CPI vs Core*
(Not Seasonally Adjusted)

The latest data points are for July 2020.
The Canada figure (CPI) is the All Items Consumer Price Index.
*Core inflation is CPI-U less its often most volatile sub-components, food and energy.

Data source: Statistics Canada.
Chart: ConstructConnect.

Graph 5: U.S. vs Canada All-Items Inflation
(CPI & CPI-U Not Seasonally Adjusted)

The latest data points are for July 2020.

Data source: Statistics Canada and U.S. Bureau of Labor Statistics (BLS).
Chart: ConstructConnect.

Graph 6: U.S. vs Canada Core* Inflation
(CPI Core & CPI-U Less Food and Energy Not Seasonally Adjusted)

The latest data points are for July 2020.
*Core is all-items inflation less its often most volatile sub-components, food and energy.

Data source: Statistics Canada and U.S. Bureau of Labor Statistics (BLS).
Chart: ConstructConnect.

Graph 7: Inflation Measures (Year-over-Year) U.S. and Canada
Previous Month & Current Month (June & July 2020)

*'Core' inflation for both countries excludes highly volatile items − i.e., mainly food & energy products.

Data sources: Bureau of Labor Statistics & Statistics Canada.
Chart: ConstructConnect.

The Inflation-Interest Rate Plotline

At present, and as is apparent in Graphs 8 and 9, inflation in the U.S. and Canada is falling short of what's considered desirable, +2.0% y/y. But there are reasons to believe the rate of price advance may soon take flight.

Extreme government debt and extraordinary credit easing by central banks are fiscal and monetary forces that, if the past is any guideline, will light a fire under prices.

Plus, material shortages, resulting from de-globalization and corporate bankruptcies, will be a spur to price hikes. Also, retirements of aging workers with unique skill sets ‒ who see the dangers of the coronavirus for their age cohort as a clear message to grab their 'freedom' ‒ pose a replacement challenge for employers, with all that means for wage increases.

What are the knock-on implications of inflation rates that expected to speed up?

Fixed interest rate debt carried by individuals and corporations is generally easier to pay off when inflation is more heated. Returns from rising incomes and pricier-product sales can better handle carrying costs and make inroads into outstanding principal amounts.

Variable interest rate debt, though, as found in personal (e.g., HELOCs - home equity lines of credit) and payroll lines of credit (i.e., to be carried at 'prime' plus a premium), is a story with a different plotline entirely. Faster inflation inevitably drives interest rates upwards and the burden can quickly become formidable.

Graph 8: U.S. Inflation Rate

Based on year-over-year 'All-Items' Consumer Price Index (CPI-U), not seasonally adjusted (NSA).
CPI-U is for 'All Urban Consumers, U.S. City Average'. A desirable rate of inflation is around +2.0% y/y.
Latest data points are for July, 2020.

Data source: Bureau of Labor Statistics (BLS).
Chart: ConstructConnect.

Graph 9: Canada Inflation Rate

Based on year-over-year 'All-Items' Consumer Price Index (CPI-U), not seasonally adjusted (NSA).
For a variety of reasons, there is a desirable rate of inflation and it's around +2.0% y/y.
Latest data points are for July 2020.

Data source: Statistics Canada.
Chart: ConstructConnect.
Alex Carrick is Chief Economist for ConstructConnect. He has delivered presentations throughout North America on the U.S., Canadian and world construction outlooks. Mr. Carrick has been with the company since 1985. Links to his numerous articles are featured on Twitter @ConstructConnx, which has 50,000 followers.

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Pandemic Shines Spotlight on Price Elasticity - constructconnect.com

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An interesting sidebar to the coronavirus story has been seeing how elastic prices are to dramatic shifts in retail sales and other high-profile categories of economic activity (e.g., in the travel sector). Wider than usual percentage changes have made relationships more apparent. For July 2020, the U.S.

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The income elasticity of demand measures how responsive your demand for a good is to changes in your income.
= percent change in quantity demanded /
percent change in income
* Do not use absolute value because IED is
+ Positive for normal goods
- Negative for inferior goods

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Marginal Revolution University is a great series on YouTube.

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How much does quantity demanded change when price changes? By a lot or by a little? Elasticity can help us understand this question. This video covers determinants of elasticity such as availability of substitutes, time horizon, classification of goods, nature of goods (is it a necessity or a luxury?), and the size of the purchase relative to the consumer's budget.

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Quantities demanded and supplied respond to changing market conditions. Elasticity measures how much they respond.
Price Elasticity of Demand - How much quantity demanded responds to price changes.

Businesses Use Demand Elasticity - It impacts total revenue and informs business strategy.

Income Elasticity - How much quantity demanded responds to changes in income. Cross-Price Elasticity - How much quantity demanded responds to changes in prices of other goods.

Price Elasticity of Supply - How much quantity supplied responds to price changes.

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How To Understand Elasticity (Economics)

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As we saw in our textbooks, the job market can be thought of in terms of elasticity. I believe that current 'Great Resignation" illustrates that fact. Employees are selling their time for a price: wages, benefits, etc. Since the pandemic, however, many workers have reevaluated the price of their time and left their jobs, resulting in more demand for workers but at a new, higher price. These changing dynamics demonstrate the price elasticity of supply and demand for workers

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American workers have power. That won’t last forever.

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Cross-price elasticity is a measure of how responsive the demand of one good is to the price changes of another. The following formula offers the cross-price elasticity of demand:

% change in quantity demanded / % change in price of another good

The cross-price elasticity is positive for substitute goods, negative for complements, and near zero for independent goods

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Understanding Income Elasticity of Demand 

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Understanding Income Elasticity of Demand 

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The price elasticity of supply measures how responsive sellers are to price changes. Specifically, it measures by what percent the quantity supplied will increase following a 1% price change. The larger this percent change in quantity supplied, the more responsive sellers are to price changes.

% change in quantity supplied / % change in price

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Similar to the elastic demand chart, this describes the various types of elastic supply

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Helpful chart for understanding total revenue.

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This video does a great job explaining elasticity!