Tuesday, June 15, 2004

Summer: time for ice-cream

It's tough to sell ice-cream.

Not only is it a highly competitive market, but you are also competing with the toughest competitor of all: Mother Nature.

Ice-cream sellers are at the mercy of the seasons.

The demand for ice-cream waxes and wanes with the months of the year.

So does the price.

To try and get people to eat ice-cream when they otherwise wouldn't, you need to make it cheaper; everyone has a price.

Market forces can overcome the forces of nature. The poor ice-cream seller, however, is at the mercy of both.

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To the casual observer, the price of ice-creams might seem to be very predictable. In the summer, prices will rise. In the winter, prices will fall. Not too complicated.

Now take the entire economy and you get a very complicated picture indeed.

Every market is affected by the seasons. Not all of them to the extent of the ice-cream seller, but the seasons play an important role in explaining why prices rise and fall.

It's important for policymakers to distinguish between factors that are seasonal and those which reflect a more fundamental shift in the economy.

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A lot of emphasis is put on the price of fuel. Anyone who owns a car needs to buy fuel. When more people want to drive in the summer, the price of fuel is going to rise. Like in the case of ice-cream, this is soley due to the fact that temperatures are rising and everyone is hitting the road. Like the demand for ice-cream, this won't last.

When making a decision on interest rates, policymakers need to be able to consider the current strength of the economy compared to any other stage of the business cycle. Seasonal changes should not be allowed to influence this decision.

Like the ice-cream seller in the winter, things can and will improve without the help of anyone else.

The price of ice-cream that doesn't include seasonal variation is the only way to guage the true strength of the market. This applies to the whole economy too.

1 comment:

Alan Soon said...

I like the ice cream analogy. I think you're a great writer. Anyway, more importantly, my response:

Isn't everything seasonal to some extent? The cost of apartments for example... or the price of a carrot. Even clothes. Everything, arguably, is seasonal. How do you explain that?