Have you ever noticed how the prices of things we buy every day can be surprisingly sticky?
Over the past decade, the average price of your morning coffee has crept up by just 20 cents. Chances are your $3 scoop of ice cream in 2008 costs either the same as it did all those years ago or, if you’re unlucky, about $3.15.
The price of the latter is so fixed, in fact, that Finder analysis shows it’s had just a 5% increase over 10 years. This is surpassed far and away by Australia’s general inflation figures of 25%, and food and non-alcoholic beverages which have grown in price by 24%.
The reason for this, as Melbourne University economist Guy Mayraz says, is that businesses selling high-volume items — like coffee or ice cream — don’t tend to change their prices, in an effort to appease customers who can always just go somewhere cheaper.
“If prices fluctuate, businesses will be perceived as unreliable,” he told Crikey. “If everyone expects one price, and one shop raises its price, that causes a significant percentage of customers not to buy from them.”
It’s an implicit contract — unspoken, but obeyed by business and customer alike. Mayraz said the contract held true in high-information transactions, when the buyer has a pretty good idea of what something should cost. These are, according to him, “the businesses where there’s an information asymmetry between customers”.
Everyone in Melbourne knows around about how much you should pay for a coffee. We’re all able to spot price-gouging around our city’s tourist hotspots. At the risk of sounding irredeemably Melbournian, being offered a latte for $5 will merit the response of Darryl Kerrigan in the epochal film The Castle: tell him he’s dreaming.
So it will come as some comfort that coffee price inflation has tracked in at 6% over the decade — the difference between a $3.30 cup in 2008 and a $3.50 cup in 2018.
Rent, on the other hand, has grown 38% over 10 years — a figure which is seriously out of whack with broader inflation figures. Although that’s nothing compared to the quiet price deflation in consumer electronics, which has seen an enormous drop of 48%.
Is this sustainable?
Life has generally become more expensive over the past decade. But, according to Mayraz, it’s crucial to understand that although prices and wages have risen, profit margins per sale could still be very high.
“Whether coffee is profitable or not is more to do with how much coffee is sold, rather than the price they sell them for,” he said. “That’s why this situation is stable, it doesn’t make sense for businesses to move away from that.”
This doesn’t mean prices will never change. In fact, though many retailers don’t move prices in line with inflation, they often choose to make collective leaps and bounds every few years. If a business slowly creeps up their price, they break the social contract. But if all businesses do it at the same time, then a new price regime emerges.
Another contributing factor to price change is quality and consumer standards. IBISworld Senior Industry Analyst Bao Vuong told Crikey prices for ice cream in the low end of the market had actually fallen as tastes change. Australia’s ice cream connoisseurs developed a sweet tooth for luxury brands, and were willing to pay for them.
IBISworld Senior Industry Analyst Bao Vuong told Crikey prices for ice cream in the low end of the market had fallen as tastes change. Australia’s ice cream connoisseurs had developed a sweet tooth for luxury brands and were willing to pay for them, he said. Those on the low end of the market then had to reduce price to compete as an alternative.
Guy Mayraz agreed saying, “Unless a product is very, very well known, consumers are more willing to switch to cheaper alternatives, rather than spend on a product that keeps increasing in price.”
So how did various cities around the world all agree on this average price for everyday goods? Mayraz says it’s a bit of a mystery, though pointed to the idea of equilibrium — the idea that businesses naturally arrive at prices the market is willing to pay. This situation can only occur in a high information market, where people consistently and routinely buy goods.
All this to say you have a good argument for the next time your local cafe wants $5 for a latte.