Re: "The High Cost of Living vs. The Cost of Living High"

Below are a few of my thoughts regarding this post.

VIA Carpe Diem [full post is linked in Title above]

Based on a suggestion yesterday from a student in my MBA class (MGT 551 Business Economics), the graph above shows the declining share of disposable personal income (data) spent on food (data), clothing (data), and shelter (housing and household operation) since 1929. From a high of almost 59% in 1933, the percent of disposable income spent on food, clothing and shelter today has continually fallen, and today (2007) is only 33%.

The problem I have with these types of stats is...

• People have taken the savings and put them into other spending categories...
• Such as Cable TV... Internet... Mobile phones... 401k...
• People have less money left over at the end of the month...
• Funds are all allocated...
• There is not much fat to cut in personal budgets...

You may not agree, that is OK.

Takeaway:
When Food, Fuel and Shelter costs rise rapidly there is no way for the average family to easily adjust to the new realities.

OIL PRICE INCREASE

Here are a few reasons oil jumped $10 in one day last week

1. Hawkish comments out of Israel on Iran
2. Unemployment increased .5% when a .1% increase was expected
3. The European Central Bank made some statement that were interpreted as meaning higher interest rates sooner rather than later. This lead to a weakening of the US$. Oil is priced in US$.
   

These are the key factors that most likely lead to last weeks oil price spike.

What are your thoughts?

OIL PRICES SHOOT UP! June 6, 2008

Markets are jittery today. Previous post on peak fuel prices should have held true. Prices will probably rise at a swift pace if panic overtakes the market.

Will have to analyze factors that are in play and previously were not included in previous post.


VIA - MSNBC

Oil rises more than $10 to record high
Some analysts forecast price could hit $150 a barrel by Fourth of July
NEW YORK - Oil prices shot up more than $11 to a new record above $139 Friday after Morgan Stanley predicted prices would hit $150 by the Fourth of July.


Analysis and posts are forthcoming as new information becomes available regarding this important story.

Also reported today was that US Unemployment rose to 5.5% for May. It was 5.0% in April and it was expected to rise 0.1%. See link for more details.

Business Week: Inflation Gnaws at Pet Food Companies

Inflationary Pressure

Inflation has been in the news a lot lately. Most of the talk has centered on gasoline and food prices. Pets eat too and feeding them is going to cost more even if prices stay the same.

You say 'How is THAT possible'?

The folks that sell pet food to your local supermarket will soon be selling less product for the same price. You will have to buy more packages in a given year. Continue reading and see Math Analysis below.

You may have to make extra trips if the food doesn't last as long as before. In the past you might have been able to go two weeks between purchases. With the smaller packages you might run out a few days early and have to drive to the store to purchase more.

What Might Consumers Do?

• They may buy an extra bag when purchasing. This may lead to increased out-of-stocks. [lost sales to the brand?] [store reputation is damaged by out-of-stocks leading to channel, chain or store switching]
• They may buy a bag of store brand as a hedge against running out. [Big Brand sales decline] [Store brand and retailer gain margin points and dollar profits]
  
• They may switch to the next size up [Big Brand volume, market share and dollar share increase] [Store gets bigger basket size / register ring].
  
• They may move category purchases to Wal-Mart, Costco or specialty pet stores to take advantage of larger package sizes and lower cost per unit. [Big Brands lose pricing power as buyers gain more market share] [Supermarkets lose as high dollar item purchases move to other sales channels]
  
• They may try another brand [Big Brand A loses sales to Big Brand B,C, D, E or F]

There are certainly other consumer behavior possibilities.

Math Analysis

If the consumer makes no changes in purchase behavior and buys the Big Brand they will buy a few extra packages per year. An example is as follows. Before the cost/size changes the customer buys a 4lb bag at $5.89, lets call that $6. We will also assume that this amount lasts two weeks [14 days]. In a year they will buy 26 packages at $6. Total yearly spending is $156.
With the package size reduction perhaps the consumer can only get 13 days out of it. With a 13 cycle per package the consumer will need to buy 28 packages in the same 52 weeks. This means this consumer will be spending about $12 more per year for pet food.

What Are Your Thoughts?

Boston.com: Frustrated owners try to unload their guzzlers

Good luck selling vehicles that have low fuel mileage.

• Good buying opportunity if you need a truck or SUV for business
• Drive few miles per year <10,000
• Three fill ups a week @ $75 is a ton of money per year, greater than $5,000 a year for sure

Numbers to ponder...

• @ $4 a gallon a 10 MPG vehicle costs 40 cents in gas per mile.
• @ $3 a gallon a 15 MPG vehicle costs 20 cents in gas per mile.

Selling now is like...

• Selling a stock when it is at its lowest price
• Ending a bad situation before it gets worse
• Cutting ones losses
• Learning there are costs to everything

What are your thoughts?

Business Week: Exxon: Profit Pirate or Tax Victim?

The oil giant paid $9.3 billion, or 49% of its first-quarter gross income, in income taxes. Is that enough? Depends on who you talk to

NOTES:

• Taxes make up a big percentage of profits
• That $9.3 billion in taxes does not include taxes paid by consumers at the pump
• Michigan: The gasoline tax is reported as 54.4 cents per gallon
• What is the rate in your state?
  
• "...Russia and Libya charge companies up to 90% of the revenues they collect for extracting oil..."
• Nice to see MJ Perry get some recognition
• His website is HERE

What are your thoughts on Exxon, Fuel Prices, or CAFE Standards?

NYT: Recession Diet Just One Way to Tighten Belt

Interesting article in the New York Times.

By MICHAEL BARBARO and ERIC DASH

Published: April 27, 2008

Stung by rising gasoline and food prices, Americans are finding creative ways to cut costs on routine items like groceries and clothing, forcing retailers, restaurants and manufacturers to decode the tastes of a suddenly thrifty public.

How are your purchasing patterns changing?

HEALTH CARE COSTS

Whirlpool Factory Suspends 39 Workers, Saying They Lied About Tobacco Use

When filling out documents you should always be truthful. Firms are trying to keep costs under control. Health care is an expense that is rapidly increasing ["Since 2000, employment-based health insurance premiums have increased 100 percent"]. Firms are assigning costs to people who are more expensive to insure. Apparently some people may have lied in paperwork they filled out stating they were not tobacco users. This may have been done to save the $500 extra the firm charges tobacco users for insurance [< $10 a week]. A small excerpt is below. Full story can be found here.

"A 2007 national survey showed that 16 percent of all large employers -- those with 20,000 or more employees -- adjust health care premium contributions according to the worker's smoking status, according to the human resources consulting firm Mercer."

Thoughts & Analysis

This is surely going to increase [above 16%] across employers of all sizes in the coming years. Especially if health care expenses are significant for the firm. Some firms have such high turnover that employees are not employed long enough to gain coverage. This is most certainly the exception to the general trend.

If it turns out the employees committed fraud in their paperwork they will be terminated. Now is bad time to be losing a job [not that there is ever a good time to lose a job]. Hopefully there are some lessons learned from this situation.

Always be honest. Even if it is going to cost you.

Start thinking about your health and fitness level. You should take good care of your body; it's the only place you have to live.

The choice is yours. What are you going to choose?

INFLATIONARY PRESSURES

Cable TV Price Inflation

People are concerned about rising prices. Food, fuel and cable TV. Food and fuel are relatively new in the inflation game. Cable TV prices have been outpacing inflation for what seems like forever. You will find a New York Times article here about cable price inflation from nearly 20 years ago.

Several years ago it was reported here that "The average cable bill rose 5.6 percent in 2005 — to $43.04."

Question #1

At what price would you cancel your pay TV service [$50, $100, $200, $400 per month]?


Question #2:

How long can the price of a product or service increase before revenue decreases by either substitution or ending use of the product or service?