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Last Updated: Monday, 17 January 2005, 17:45 GMT
Consumers enjoy falling prices

By Evan Davis
BBC economics editor

Chinese textile workers
China can now produce clothes incredibly cheaply
Things are getting cheap.

And I mean, "things". Things you can touch and feel. Not intangible services, but manufactured goods.

Manufactured goods have been getting cheaper, both in absolute terms and relative to services.

Look at the Consumer Prices Index, and you see that cumulatively, since it was first launched in 1996, the prices of "goods" have fallen an average 2%; while the prices of services have risen 35%.

Material matters

The most talked about example has been in textiles: since 1996, the average price of clothes has fallen 36%. This obviously reflects the fact the world has become rather good at making clothes and there's an abundant supply.

It means that you can buy jeans for 4, about the same price as two large cappuccinos. (Of course, you can also buy jeans for 140 at Diesel if you wish, but what you are really buying there is a cheap pair of jeans, with some very expensive cachet included).

But it is not just clothes that have been falling in price: new cars are 1.5% cheaper than they were in 1996; household appliances are 24% cheaper; toys are 30% cheaper, and of course, in the audio-visual category, you'll find things are on average now 56% cheaper than they were nine years ago.

Human cost

As we tend to earn more, and get richer each year, there has been a dramatic fall in the number of hours you need to work to afford most consumer goods. Indeed, about six hours work at the British minimum wage will probably now earn you enough to pay for a microwave oven.

Televisions for sale at Dixons
Televisions and hi-fi equipment have fallen heavily in price

The prices of services on the other hand - particularly the labour intensive services - keep up with earnings. Six hours of minimum wage work would probably not pay for a plumber to replace a washer.

Now this development has some interesting consequences: the cheaper goods become, the more casual we are about how we consume them.

A piece in The Times last year reported a decline in the number of burglaries, which was put down to the fact that the thieves can no longer get a good price for the items they steal. Who wants to nick a second hand DVD player, when you can buy a new, legal one for 20?

Below, I list half a dozen other trivial examples and observations that reflect the era of "cheap goods" into which we have moved. I would welcome your emails with other examples. (We should get to at least a hundred different observations between us.)

Nothing's for nothing

Of course, the cheap goods era has more serious consequences too: it has implications for the environment (will we demand more raw material to make things, and will we create more waste as we dispose of them?).

UK landfill site
Are cheap goods adding to the UK's waste problem?

It has implications for the labour market (as we get more efficient at making things, we paradoxically employ fewer people in producing them, so old manual jobs tend to disappear). It has implications for companies, trying to compete and differentiate themselves.

We have barely begun to think about these consequences.

But over the next few decades, we are surely seeing in manufacturing a process that will closely emulate the trends already seen in agriculture since the industrial revolution.

Over the last few hundred years we have got much more efficient at farming; we have become more casual about our consumption of food (indeed, we probably eat too much); and we are employing fewer people on farms.

Of course, we should not exaggerate the changing terms of trade between manufactured goods and services.

Manufactured items have always fallen in price relative to services. This is not new. (It's all down to fact that we tend to get more efficient more quickly in manufacturing than we do in services, so for example we have improved our car-making in the last 50 years far more than our skill at waiting tables in restaurants).

And we should note, that there are some services that have fallen in price too (telecoms and airline tickets come to mind).

Prices are still falling

But the pace of decline in manufactured goods prices has picked up in recent years. The arrival of China on the global scene has contributed; the use of new technology too; and improved logistics, distribution and transport have allowed the other causes to make their contribution.

And if these are the causes, manufactured deflation may not be over yet.

On clothes, for example, it's actually getting easier for China to make and export to us, as a swathe of quotas and restrictions that have limited free trade in textiles disappeared just as the new year arrived.

Whether other consumer durables go on getting cheaper is less obvious. But, it is probably best to assume that for the time being, prices will go on going down and competition will go on getting more intense.

Good news for consumers gives plenty for business and policy-makers to think about.

You know manufactured goods are getting cheap when:

  • they use real terracotta dishes in disposable pre-packed meals.
  • children get spoilt at Christmas, because toys are so affordable.
  • CDs are sent out as junk mail.
  • repair shops disappear from the high street
  • it's almost as cheap to buy a new duvet, than to dry clean an old one.
  • people drive absurdly large vehicles on city streets, as we have got better at making vehicles cheaper, and have not, evidently got better at building our streets.


    Your comments:

    Items that have become uneconomic to repair and therefore should (perhaps) be re-classified as consumables include ink-jet printers, kettles and cameras. The growth of the platform and software business model grows apace as consoles for games, shaving systems and (again) printers tumble in price while the consumables / software remain relatively expensive.
    Carl Mather, Bangor, Gwynedd, Wales

    The Saturday queue for the local tip includes people throwing away old but fully working colour TVs, as it costs more to advertise them for sale than they are worth.
    David, London, England

    Products are getting cheaper as Evan says...

    It's cheaper to buy a new computer printer than buy replacement ink cartridges for your old one.

    You can buy a video from a supermarket for less than it costs to rent the same title.

    You get a free dvd player with your Sunday papers.

    But, it can cost 12 to pay per track and download an album from legitimate internet music sites (for which you get nothing more than a few million 1's and 0's transferred down the phone line) or you can go to the local filling station and pick up the real thing (including case, sleeve notes, disc and all) for 7.99.
    Andrew, Herts, UK

    I've always been amazed that a Muller "fruit corner" yoghurt costs 33p --same as it did in 1993.
    Andrew Stewart, Stirling, Scotland

    Interesting idea but (IMHO) it's a bit more complicated than that coz the price a consumer pays is made up of both the cost of the goods (manufacturing cost, which is going down) & the services involved in distribution (such as the truck driver, the accounts clerk, the sales assistant, all of whom are getting paid more without any great increase in productivity). One result is that a tiny spare part (a plastic knob) for our shower unit cost a good proportion (11) of the price of a complete unit (about 100 the last time I checked). Similar examples are commonplace - go get a trivial replacement part for something in your car, a single screw or nut say, & you'll see what I mean. So yes, "big budget" manufactured goods are getting cheaper but very small items are actually vastly -- in some cases hundreds of times -- more expensive than 10 or 20 years ago (back then small spares for cars were often simply handed over free; & I bought the same plastic knob for the same shower unit about 6 years ago & paid a fiver - QED I think).
    Denis Crampton, Bracknell, UK

    You know manufactured goods are getting cheap when: It's cheaper to go and buy a new printer than get ink cartridges for the old one
    Dom M, London

    When the cost of the extended warranty is more than the product itself!
    Phil, London

    Have you seen how expensive it is to rent a baby seat with a hire car? For a fortnight's rental it's as cheap to buy your own seat and then throw it away!
    Paul Eaton, Amersham, England

    I just replaced my Fridge Freezer - the old one cost 449 in 1992. The new one cost me 300 with lots of new technology - frost free, more efficient, better internal design and lighting. If you include the retail price index adjustment the price today is half of the 1992 cost.
    Lewis Lack, Newark, England

    Oh Yes. Goods are getting cheaper and cheaper. Our microwave oven suddenly stopped working. I had to pay $30 just to find out what was the problem. Suggested repair cost was around $130. We threw the old one out and bought a new one with better features for $90. Certainly at that moment I didn't think of pollution. Only savings were in my mind.
    Latha, RockyHill, USA

    I am glad it's not only me that has noticed this trend. Even mundane things like the weekly grocery bill have hardly changed in price over the last 10 years.

    On the other hand, there have been hefty increases in the cost of things we cannot do without, and in particular things we cannot avoid paying for. Examples of the second category include Council Tax, Tobacco Tax, Fuel Tax - this list is almost endless. Then there are the monopoly businesses, such as the Royal Mail, and things like phone line rental, largely the preserve of BT.

    What do most of these have in common? They are charged by the Government or Local Councils. It would be very interesting to recalculate the rate of inflation over the past few year EXCLUDING government taxes and charges.
    Andrew Taylor, Nottingham, UK

    The price of manufactured goods will eventually start to rise as the cost of disposing of them rises. Governments will be forced to increase VAT on certain goods to cover the high costs of disposal.

    Enjoy the era of cheaper fridges, stereos etc. It can't continue much longer.
    Andy, Newcastle, England

    It's now as cheap to buy a new Qualcast Panther 'push lawnmower' as it is to get the blades on an old one sharpened! (30).
    Ken Brown, Dundee UK

    My double bed bought 10 months ago in Japan cost 300gbp. It will cost 450gbp to ship it to Hong Kong. Or 5gbp to dispose of here.

    Ridiculous.
    Paul, Tokyo, Japan

    Your comments about the relative cost of goods making what used to be expensive goods disposable is so true. I recently had to get my dishwasher repaired. I rang around and the estimated cost for the repair including call out charge would have been 150. I instead went and bought a new machine witha 2 year warranty for 107, saving 43 and getting the unit covered for another 2 years for free! Why would you pay for a repair when you can get new and warranty for less? The cost will come later though as the environment gets stacked up with old machines that were not cost effective to repair.
    carol allan, Lancashire

    Kelloggs are giving away DVDs on the front of cereal packets. Packaging costs more than the manufactured goods inside
    David Bond, Maidenhead, UK

    An interesting statistic, is that you can now buy a small TV set for less than half the price of the annual colour TV licence.
    Paul Lovell, London, UK

    I bought a radio for less than a pound of grapes the other day, then paid more for the batteries to go into the radio than the grapes and the radio combined
    Dan Major, London, England

    Prices of audio/visual equipment have come down, but we end up spending as much as we used to, because the quality isn't as high. I have a 15 year old VCR, which has outlived the many newer models I've owned since. It's still going strong and has never had to be repaired.

    The trouble is, so called 'efficiency' in manufacturing, means that rather than items being built to last, they are merely built to sell. This obviously has an adverse affect on the environment too.
    Mel, London, UK

    Great article! I think we all appreciate that goods are getting cheaper whereas services costs escalate but there isn't much thought (or at least) commentary on the consequences. A couple of points come to mind: 1. CPI Maybe the constituents of CPI are now outdated and hence the CPI measure is seriously understating the cost of living. Most of us have more or better 'things' but still struggle to make ends meet because services outgoings have increased dramatically. Have two examples: One, had a new boiler fitted recently. The cost of the boiler itself was less than the last time 4 years ago (650 compared to 750) but the labour cost had more than doubled to 800 (2 guys for less than a day's work)! Two, got a quote to recorate from the same chap we used 3 years ago. Wanted 1500 compared to 750 last time for the same job! The paint itself cost less now than before...

    But I doubt the government would ever contemplate redefining CPI as this would likely have a huge upward impact on reported inflation hence interest rates hence house prices etc. Are we living on borrowed time where low interest rates are determined by understated inflation figures, enabling us to borrow more to be able to just survive?

    2. Sustainability of goods price deflation I wonder if we're going to hit a hard place soon, when either (a) no matter how cheaply things can be sourced from China, they just can't be sold any cheaper here because of logistics/labour/property/marketing costs here or (b) maximum efficiency levels are hit in China. Hence goods price deflation will start dropping out of annual inflation measures

    3. Impact on economic growth Consumers have to buy more things for companies to earn the same revenues - e.g Dixons probably sold more things this Christmas compared to last but this wasn't reflected in sales figures because of price deflation. This means more marketing spend to encourage more unit consumption (but there is no price deflation in marketing costs) and/or lower profitabilty which will lead to restructurings (job losses), which will lead to lower consumer spending and hence lower economic growth

    I just don't think this 'golden age' can last forever!
    Amrit, London

    Yes things are getting cheaper but resources are not infinite and there is no such thing as a free lunch. There are costs; more carbon pushed into the atmosphere; disposal of waste. in the short term prices may be low but will inevitably rise in the long term with the depletion of resources. P.S. I enjoy your simple economic logic!
    Chris Grace, Accra, Ghana




  • SEE ALSO:
    More UK bargain hunters hit sales
    29 Dec 04 |  Business
    Record sales for 'cheap' albums
    19 Aug 03 |  Entertainment



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