Inflation is here...and there!

by Colleen

"Inflation is coming, people."

You may have read a few articles to that effect lately. In fact, I've noticed an increasing rate of inflation-related articles in the past few months, which, of course, is a strong indicator that the rate of inflation itself is increasing, because that's how inflation rolls.

OK, it's trendy in the B-world these days to toss around "inflation" and "commodity speculation" like last year's recession conscious (cheap) suits - agreed. But if you've been following global weather patterns over the past few years, and also noticed that the United States has made no grounds in improving/changing their sugar import process which is currently summarized as: ix-nay uba-cay and yay! tariffs, then you're already aware that we have experienced substantial supply shocks in various markets around the world, where "shock" means an unexpected decrease in supply. And, holding demand in these markets constant, or allowing for even a slight increase in D, this means a rise in prices is inevitable.

What markets?, say you.

It's mostly the commodities, [which make up the base, if you think of our economy as a triangle with finished goods and services on top] although it's starting to spread to the intermediate goods, but I'll get to that later.

Let's go through a few of them:

Wheat: Droughts in Russia/Ukraine decimated their wheat supply last year and the weather outlook isn't much better this year. Medvedev & co. have banned all wheat exports indefinitely, as of last August. The US is now the number one grain exporter in the world with Australia not far behind...but wheat markets took a hit. Prices: up.

[Funny side story: Once Russia went all motherland on the world, everyone was like "hey...so we still need wheat" and the US said, "OK we can step up our exports" and Oz said "Right, we can too, cheers", and France said, "So can we, tres bien!" But there are different wheat varieties. For example, Hard White, is used for breads and brewing beer, while the Hard Reds are the main source of all our crusty bread, sliced bread and baguettes. Then there's Soft Red Winter, a "low-protien wheat used for cakes, pie crusts, pastry flour and muffins". Guuuuuueeeesss which kind the French export. Thatsrite! The French offered up the best Soft Red Winter Wheat they had to offer, and the world was like, "uh, sorry France, but what the hell are we gonna do with croissants?". BURN!]

Steel: Interruptions in the markets for the materials used to make steel are the problem here. Iron ore and coal prices are increasing. Slightly related is China's decision to stop exporting rare earth metals which are used in alloying and strengthening steel - not good for input costs all around, although I know a little mine in CA that's pretty happy right now. Prices: up.

Coffee: Floods and landslides shook up Brazil and other parts of South America in 2010, so coffee is probably low on their list of priorities now, especially as they deal with infrastructure repairs while facing high inflation themselves, but a priority or not, an inevitable consequences is the tightening up of the coffee export market. Prices: up, up, up.

Sugar: Again, bad weather in tropical climates is to blame. But companies in the US have been passing price increases in this commodity on to customers for the past couple of years now, and it's not likely they'll decrease any time soon. It's difficult because sugar prices are kept high on principle - the embargo on trade with Cuba, and supporting our neighboring economies by promoting NAFTA and CAFTA - but it's probably for the best, considering the uproar over weight gain and preventative care these days. Prices: indubitably up.

~~~~

OK beeps, I'm tired. Tomorrow - more commodities, my speculation on how far into the US economy inflation is working itself, and what you can do to inflation-proof your household (incur massive amounts of debt! I am only partially kidding. Nothing is inflation-proof).

Laters

Stuff economists like

by Colleen

I was in a meeting the other day and a situation came up where the organizer asked some of the attendees to pick a number between 1 and 20. The first lady picked 17. The next lady picking was clearly distracted and didn't realize she was supposed to pick a number. She thought the numbers were page numbers and was rifling through her binder, until the organizer clarified. Then she looked flustered and blurted out, "16".

My first thought was 16? what? Okayyyy...but even before I could mentally finish extending the "ayyyyyy", another thought flashed through my mind and I was like, THAT'S BRILLIANT!* See what she did there? (albeit, probably inadvertently) And, ok, maybe everyone else in the civilized world has already realized this, but it took until the third week of my 28th year for me to, so excuuuuuuussse me. This is what I realized:

In a 2 person game where each person guesses a number between a certain range to try and be closest to a pre-selected number, the optimal strategy for the second guesser is to pick the next consecutive higher number if the first number chosen falls in the bottom half of the range, and to pick the next consecutive lower number if the first number chosen falls in the top half of the range. (Obviously, the optimal strategy for the first person is to pick the midpoint, if possible :)

So taking the real life example that occurred in my meeting, by choosing 17, the first person has a 4/20, or 20% chance, of being the closest guess. By choosing 16, the second lady effectively locked in all the remaining numbers for herself, and has a 16/20, or 80% chance of being the closest guess. (Happy little aside: This is totally and most completely game theory at its purest. Love it :)

If the second lady had tried to balance out the first lady's guess by choosing 3, she would be automatically closer to the lower numbers, but she would concede 11 - 16 to the first chooser (1st's chance would become 50%, 2nd's would decrease to 45%), and they would both lose, should the actual number turn out to be 9 or 10.

Multiple person game:

Now, this can be extended further, and in the case of the meeting last night, my mind probably would have been completely blown had the third chooser then said 15! (Which I will totally do, should this exact opportunity ever arise again) However, players have to be aware of how many total players there are in the game and adjust their strategies appropriately. Choosing 15 is genius if you're in a 3 person game, but stupid if you're in a 4 person game. The general strategy in a multi-person game is to try and choose last, and then select the number that "locks in" the greatest range of numbers for you. If you're not choosing last, but you're aware of how many people are playing, you will want to pick a number that decreases the range available for the next people choosing, but still gives you some room to work with..so picking a consecutive number to the first as the second player is a very bad idea in theory, because you could get locked in to just that one number, BUT...if not everyone you're playing with realizes the optimal strategy is to lock you in (like in my meeting), then it's not that bad an option - just riskier.

The ideal situation is to pick first and mess it up for everyone else by choosing the midpoint, or last and then work off the ranges available to you by picking a consecutive number of an earlier guess which locks in the biggest range left.





*if you were playing a two-person game.