UAL grounding fleet to save costs and increase loads. Continental announced that it will cut flights which reduces capacity.
Notice that this is not a change in the price for seats but a reduction in capacity or the service provided by the airline. You cannot fly when you want. The fixed cost of running flights that are not full is too high relative to what would be the impact of raising ticket prices in response to the change in the marginal cost of fuel. The airline industry has aways been marginally profitable but the latest change is another attempt to rationalize the industry. Will it work? The only thing we can say is that the airlines must believe that oil price increases will last for a long-term otherwise firms would not cut their capacity.
Food -
Pepsi announced that it will cut the contents of its snack packages while raising prices. Pay more for less. Smithfield is reducing its hog breeding herd. Its stock plunged after it reported lower earnings.
The costs of price shocks are real and the longer the shock goes on the more firms will adjust. The real problem for inflation is whether we will see a wage price spiral. This is 1970's lingo, but it was the link between price shocks and wages which caused the main increase in inflation. Currently, the world is in a different place but what we are seeing is some wage adjustments and shortages in places outside the US, like China.
Notice that this is not a change in the price for seats but a reduction in capacity or the service provided by the airline. You cannot fly when you want. The fixed cost of running flights that are not full is too high relative to what would be the impact of raising ticket prices in response to the change in the marginal cost of fuel. The airline industry has aways been marginally profitable but the latest change is another attempt to rationalize the industry. Will it work? The only thing we can say is that the airlines must believe that oil price increases will last for a long-term otherwise firms would not cut their capacity.
Food -
Pepsi announced that it will cut the contents of its snack packages while raising prices. Pay more for less. Smithfield is reducing its hog breeding herd. Its stock plunged after it reported lower earnings.
The costs of price shocks are real and the longer the shock goes on the more firms will adjust. The real problem for inflation is whether we will see a wage price spiral. This is 1970's lingo, but it was the link between price shocks and wages which caused the main increase in inflation. Currently, the world is in a different place but what we are seeing is some wage adjustments and shortages in places outside the US, like China.
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