Browse by Tags

The Consumer Price Index for All Urban Consumers remained flat for a second straight month in December. Once again a decrease in the energy index countered rises in the other indexes (the food index and the all items less food and energy index ). Over the last year, CPI rose 3.0% (seasonally adjusted). Here are some year-in-review details rom the Bureau of Labor Statistics release: The energy index increased 6.6 percent in 2011, a deceleration from the 2010 increase of 7.7 percent. The gasoline index, which rose 13.8 percent in 2010, increased 9.9 percent in 2011. In contrast, the household energy index accelerated in 2011, rising 1.8 percent after a 0.8 percent increase in 2010. The fuel oil index rose 18.0 percent and the electricity index increased 2.2 percent, although the index for natural gas declined for the third straight year, falling 3.7 percent. The index for food accelerated in 2011, rising 4.7 percent compared to a 1.5 percent increase in 2010. The index for food at home rose 6.0 percent in 2011 compared to 1.7 percent in 2010. All six major grocery store food group indexes rose in 2011, with increases ranging from 2.3 percent (fruits and vegetables) to 8.1 percent (dairy and related products). The index for food away from home rose 2.9 percent in 2011 after increasing 1.3 percent in 2010. The index for all items less food and energy also accelerated in 2011, increasing 2.2 percent after its historical low 2010 increase of 0.8 percent. This was the largest increase since 2007. Several indexes turned up in 2011. The apparel index rose 4.6 percent after a 1.1 percent decline the previous year. Similarly, the new vehicles index rose 3.2 percent in 2011 after a slight decline in 2010. The indexes for recreation and household furnishings and operations also rose in 2011 after declining in 2010. A number of other indexes rose more quickly in 2011 than in 2010. The shelter index accelerated notably, advancing 1.9 percent in 2011 after rising only 0.4 percent the previous year. The indexes for used cars and trucks, medical care, education, and personal care also rose more quickly in 2011 than in 2010. In contrast, the indexes for tobacco and airline fare posted smaller increases in 2011 than 2010. Here's a look at the CPI for All Urban Consumers over the last year: Read the full release here .

In his most recent New York Times Magazine column, Adam Davidson writes about how he and his Planet Money colleagues surveyed the shopping indicator scene to see what Americans' shopping patterns might tell us about the state of the economy. From lipstick (once a strong indicator, now not so much) to Champagne sales ("consistently accurate"), there is no shortage of goods that are extolled as strong indicators. But in the end, the big takeaway is that consumers seem to remain consumers, and have yet to transition into savers. Davidson: Of all the indicators we looked at, one of the most consistently accurate was Champagne sales. The amount of French Champagne that Americans consume has predicted — with nearly 90 percent accuracy — the average American income one year later. Apparently, when we pop a Champagne cork, we know that good times are ahead (see chart). Champagne sales hurtled upward twice in recent history — at the peak of the Internet bubble in 1999 and during the heyday of the housing bubble in 2007. These were both followed by slowdowns as fewer people found reason to celebrate. There are so many indicators to choose from that you could glean just about anything regarding our economic future. In fact, the most telling indicator appears to be the sheer number of indicators themselves. Americans now have so many seductive things they can buy that there are ample consumer options no matter what we feel. Partly as a result, savings — known in economics as deferred consumption — have fallen steadily for more than 30 years, from a high of nearly 12 percent of income. It kissed zero before a tiny uptick in the past couple years. The decline of the savings rate is particularly troubling because it is consistent through busts and booms. During the fast growth of the late 1990s and mid-2000s, and the dark times that followed, people have been choosing to spend more and save less than ever before. Paradoxically, this happened just as pensions have been disappearing and life spans have been increasing. It suggests that Americans are so caught up in every short-term enthusiasm or agony that they haven't thought enough about long-term fiscal health. Read What Nail Polish Sales Tell Us About the Economy here .

Sometimes creating markets for products can be a lot more difficult than creating products. Seth Godin says that "buying something for the first time" is a fairly recent phenomenon. Before the second half of the Twentieth century, we bought what our parents bought, who bought the products their parents bought. So the challenge for getting consumers to buy new things, even when those products could really truly make their lives better and healthier, remains quite high in parts of the world where people are still buying what their parents bought. Godin discussed this challenge at the Acumen Fund's 2011 Investor Gathering :

At Vox , Philip Hans Franses --professor of applied econometrics at the Erasmus School of Economics --and Heleen Mees --researcher at Erasmus School of Economics--take a look at money illusion in China. And they find that Chinese consumers are signficantly less prone to money illusion--making decisions based on the nominal value of a good as opposed to the real value--than American consumers. Our results show that considerations of happiness, morale, and job satisfaction are intimately related with each other, in contrast to economic considerations. The default decision-making framework for respondents in China appears to be dominated by economic considerations, while the default decision-making framework for respondents in the US appears to be dominated by considerations of happiness, morale and/or job satisfaction. This may well reflect the difference in affluence between respondents in the US and China, with the former having already conquered the top layers of Maslow's pyramid of needs while (many of) the latter find themselves still scrambling at the bottom (Maslow 1943). It also suggests that affluent societies are more prone to money illusion and, hence, more susceptible to irrational exuberance (Akerlof and Shiller 2009). It is important to note that there are two distinct reasons why respondents in China are less prone to money illusion than respondents in the US. First, when asked specifically to judge a transaction on economic terms, respondents in China are more likely to correctly choose the transaction with the highest real monetary value. Second, if no guidance is given on whether to judge a transaction on economic terms or terms of wellbeing, respondents in China are more likely to adopt a decision-making framework that is dominated by economic considerations. In other words, Chinese people are more likely to correctly choose the transaction with the highest real monetary value instead of the transaction with the highest nominal monetary value. Read Are Chinese individuals prone to money illusion? here .

Retailers in the US are relying on consumers spending and spending for the holidays, but the consumers that truly matter in the global economy are in China. The Chinese government has set consumption as a priority. This will require that Chinese consumers have more money and are confident in their family's economic situation. According to McKinsey's 2011 Annual Chinese Consumer Study , these conditions have been met. Take a look at the rise in confidence among Chinese consumers: The authors point out that spending will almost certainly rise along with that confidence. But sustained growth in consumption will depend more and more on Chinese consumers buying goods to replace products that they have bought in the past. This is behavior that we take for granted among consumers in developed economies like the US and Japan. But it is new ground in a lot of product sectors in China: A few categories, in particular big-ticket items such as cars, have significant growth potential through first-time buying. For example, China is the world’s largest auto market, with 11.7 million passenger cars sold in 2010 compared with 9.8 million in the United States. But the total number of cars sold per capita is 13 times smaller than in the United States, and most car buyers in China are still first-time buyers. Personal computers constitute another category still ripe for strong growth from first-time buyers. Ownership has risen sharply from 25 percent of urban households in 2006 to 44 percent today with much room for additional growth from new users. In poorer rural areas, only ten personal computers are shared among 100 households. As incomes continue to rise in China, and as the government’s consumption-boosting measures kick in, more and more people will be able to afford such items. For many categories that have been in China for more than ten years, however, and are widely affordable albeit at different price points, the headroom for growth from first-time buyers is limited. With the exception of very big-ticket and luxury items, as well as products that are relatively new to the Chinese such as breakfast cereals, many of the largest categories such as white goods, personal care, food and beverages, and apparel have now reached penetration levels of well over 50 percent of the urban population. This means that some categories may see falling growth rates. National sales of mobile handsets, for example, grew at around 7 percent a year between 2006 and 2010, compared with 21 percent during the previous five years, a reflection of the fact that 97 percent of urban households now own a mobile phone. In such cases, an essential component of capturing rising spending power will be to persuade consumers to buy more of the same thing—either by making more frequent purchases or buying in greater quantities—or to trade up to more expensive products in the same category. Refrigerators and washing machines serve as an example. Although over 90 percent of urban dwellers now own these items, the survey shows that the average time they keep either item before replacing it has dropped in the past two years from around seven years to six. In addition, the average amount spent has risen by 9 percent for refrigerators and 15 percent for washing machines. The survey again highlights how the importance of these other drivers of category growth differs both by category and region. Read the full report here .

The primary point of access to consumers is now via their mobile phones. the Pew Internet & American Life Project has just released some new data on how Americans are using their cell phones. Here is the breakdown: Pew has the details on how members of different demographics use phones. One interesting stat that jumped out at us: adult Americans who describe themselves as Black or Hispanic are significantly more likely to use their phones to access the Web, to text, and to watch or share video. Read the report here .

With Netflix's announcement this week that the company is changing its pricing structure--essentially upping the cost for customers who wish to both have access to DVDs and streaming of content--it is worth looking back at Dan Ariely 's compelling Wired article on how companies successfully manipulate consumer behavior online. Ariely's short assessment of Netflix looks prescient: Netflix built a billion-dollar business on one simple principle: People hate late fees. With traditional video stores, customers always had to choose between racking up extra charges and returning an overdue movie without watching it. Besides eliminating the late fee, Netflix offered an exhaustive selection of films from which each user could assemble a personal “queue.” This seemed to create an intelligent system that matches users with the movies they want to see. What wasn’t to like? In practice, though, Netflix users ended up watching fewer DVDs than they might have expected. (This is fine with Netflix; it saves on postage and boosts profits.) Why? One reason is that Netflix was forcing us to choose based on what we thought we wanted to see in the future—and we’re bad at predicting our preferences. There’s a beautiful paper by Daniel Read and two coauthors showing the gap between what people want to do in principle and what they want to do right now. They asked subjects to choose several films from a list containing a mix of highbrow titles (e.g., Schindler’s List) and lowbrow titles (e.g., My Cousin Vinny). When asked which film they wanted to watch a few days later, most picked a highbrow one. But when asked which they wanted to watch right now, most went lowbrow. In principle, we want to be the kind of people who watch serious movies, maybe even French ones—just not tonight! And so our queue becomes aspirational, filled with titles that are more ambitious than the ones we really want to watch. Now that Netflix offers streaming, I’ve dropped the DVDs altogether. With streaming, we no longer get stuck with movies we only want to watch in theory. Instead, we feel like we’re paying for the right to watch any movie at any time—even if we don’t wind up watching many. Read How Online Companies Get You to Share More and Spend More here .

Are companies like Zipcar onto something? The car-sharing company caters to those who would rather pay a fee for sharing cars than shell out the dough to own their own. Rachel Botsman , author of What's Mine Is Yours: The Rise of Collaborative Consumption , says that companies with business models based on sharing are tapping into natural human behavior. Here she is discussing this collaborative consumerism in a recent Ted Talk :