Sunday, 10 August 2014

What Happened To Freddos Being 10p? (Part One).



The humble Freddo. Once the posterchild of the consumer chocolate boom, the first word in affordable sugary snacks, one of the only things you could actually buy with a 10p coin. Almost every British child has fond memories of the little sugary frog-shaped friend.
But fewer such memories are being gifted to the youth of today. No, the Freddo has been attacked viciously in recent years.

Since the introduction of the Freddo as we know it in 1994, the price has risen from a humble 10p to a more maverick 15p, to a dangerously inconvenient 17p (who carries around exactly 17p change) to its frankly outrageous current retail price of 20p. That's a 100% increase- a double in price!
There's been an outrage over this price change- a quick glance at the numerous facebook pages on the subject would confirm this.

But why has the price increased? One might say the greed of Cadbury itself- perhaps rightly so, however considering the presumably low profit margins on such a low-priced chocolate, it would be a questionable business decision to increase the price for no reason other than hope for more profits.

The answer in fact is one that you will have heard of- it affects all of us, and not just products like the Freddo- INFLATION.
Charting the scandalous Fredd-flation.

Inflation, simply put, is the increase in price of products or services.
A decade ago, 10p in your pocket could buy you a tasty little Freddo- but today, 10p cannot buy you the Freddo. So, because of inflation, your purchasing power, the possibilities of what your money can do, has decreased. You're worse off- you have to pay more than you did before, but you're not getting a larger, tastier Freddo; it's the same thing.

But inflation is not all that bad, especially if you're of the borrowing type. Let's have a theoretical (simplified) example. Say you buy a house in a period of low inflation. You pay with a fixed interest rate mortgage you've taken out from the bank. If a period of high inflation follows, your house price will rise (theoretically, as inflation=higher money supply=more money to spend, HOWEVER often other minor factors affect house price), and while you have the option available to profit from this increase (you can sell your house and make a profit), the total amount you have to pay the bank is still the pre-inflation price.
So, by the end of the mortgage payments, if inflation is still up, you've paid less than the market value of your home. So inflation has helped you!

But of course, inflation can lead to terrible consequences. Inflation is gas and energy prices has been reported to have fatal consequences on the poorer members of society (according to the Office for National Statistics, unaffordable energy bills contributed to 24,000 deaths in the UK in the winter of 2011), and that an inflationary spiral can occur- due to higher prices in the market, usually profits of companies will increase- meaning they can hire more staff- meaning more people will have income to buy products/services- meaning prices will continue to inflate as demand rises.

Inflation can also be caused by the government. You may have heard of the programme of quantitative easing- essentially money is pumped artificially into the economy to try to stimulate spending. One of the strong arguments against QE is that pumping more money into the economy causes inflation.
To understand this, think of money as a commodity- think gold. The more abundant gold there is, the less its value- and the less abundant it is, the more the value.
Money was easy to come by in Weimar Germany.
Too easy.
Of course a balance must be struck- but QE decreases the value of money, and historically some extreme QE-style programs have led to hyperinflation (think wheelbarrows of money in 1920s Germany), where money became so abundant due to printing of cash that it became worth more in paper than actual purchasing power.

So excess inflation does not sound too appetising- but neither does its opposite, deflation.
But take a nice rest. Have a nap, a little reflection and come back on Tuesday for part two, where we'll expand on deflation and more good stuff. 

SOURCES
24,000 'died because of cold homes' last winter http://www.dailymail.co.uk/news/article-2240716/24-000-died-cold-homes-winter-Fears-grow-figure-higher-year-spiralling-bills.html

investopedia.com
Mohammad Lone Editor