Monday, 12 January 2009
Clearly NO to Inflation pressure
It's just an anecdote but worth to mention. The idea is that certain price can be sustain only if there is a demand for it, or an expectation that the price is right or will rise further.
Today I received a phone call from a nice lady (based on the voice) working for Welho, a cable TV operator.
-She told me that the TV package I'm using will be phased out. I have been using this package for the past 5 years and I have been paying 20 euro/month.
-So I ask, what was the alternative in order to keep at least 2 channels, the one I was interested in.
-She proposes me one package with a price tag of 30 euro/month.
-First I made her notice that it is a 50% rise in price. Second hinted that most probably she will lose a customer if she didn't find an alternative as the price rise was absurd. So I change the roles, I gave her the alternative of either keeping me as a paying customer or get a 100% drop in price.
-Since her voice seems to be nice, I kept polite. I told her , that it will be fine to automatically cancel my subscription at the end of the period.
Service or product producer have been thinking that customers have a static behavior and somehow are product "addicts" i.e cannot alter their consumption behavior. I think they will be surprised to see how wrong they are and will find that their assumptions are wrong as we are slowly moving from an inflationary behavior toward a deflationary one where excesses are being corrected in all product or assets classes.
In fact, during the period that we are know entering - a deflationary one - the pressure to lower prices are rational. As the demand has literally collapsed, shops, producer have not choice but to try to get rid of the production as fast as possible as storing is expensive and capacity too great. So in order to fulfill that, they need to lower prices and lower capacities. Usually the latter will be done first, the second is always lagging...
But it is true that Finland has a strong wage bargaining structure that allow wage to follow rising price but not the reverse - price could fall but not salary. I think this flawed system (which was sometime praised by Finnish politicians), will prove disastrous for this small economy, as it will prevent it to readjust. The outcome will be seen in higher unemployment and bankruptcies since company will struggle to meet their wage obligation while selling services or products that will fall in price.