Consumer Income, Purchasing Power, and Confidence
The CPI and CCI are measures of the strength of the economy, and perceptions of businesses and individuals towards the economic future.
Illustrate the relationship between consumer purchasing power, pricing and the economy
- Purchasing power can change if the price of goods increases/decreases, or if inflation increases/decreases. A higher real income means a higher purchasing power since real income refers to the income adjusted for inflation.
- A CPI can be used to index the real value of wages, salaries, pensions, for regulating prices and for deflating monetary magnitudes to show changes in real values.
- if the economy expands causing consumer confidence to be higher, consumers will be making more purchases. On the other hand, if the economy contracts or is in bad shape, confidence is lower, and consumers tend to save more and spend less.
- purchasing power: The amount of goods and services that can be bought with a unit of currency or by consumers.
- consumer price index: A statistical estimate of the level of prices of goods and services bought for consumption purposes by households.
- consumer confidence: An economic indicator measuring the degree of optimism that consumers feel about the overall state of the economy and their personal financial situation.
Consumer Buying Power
A consumer’s buying power represents his or her ability to make purchases. The economy affects buying power. For example, if prices decline, consumers have greater buying power. If the value of the dollar increases relative to foreign currency, consumers have greater buying power. When inflation occurs, consumers have less buying power.
Purchasing power is the amount of goods or services that can be purchased with a unit of currency. For example, if you had taken one dollar to a store in the 1950s, you would have been able to buy a greater number of items than you would today, indicating that you would have had a greater purchasing power in the 1950s. Currency can be either a commodity money, like gold or silver, or fiat currency, or free-floating market -valued currency like US dollars. As Adam Smith noted, having money gives one the ability to “command” others’ labor, so purchasing power to some extent is power over other people, to the extent that they are willing to trade their labor or goods for money or currency.
If one’s monetary income stays the same, but the price level increases, the purchasing power of that income falls. Inflation does not always imply falling purchasing power of one’s money income since it may rise faster than the price level. A higher real income means a higher purchasing power since real income refers to the income adjusted for inflation.
Consumer Price Index (CPI)
A consumer price index (CPI) measures changes in the price level of consumer goods and services purchased by households. The CPI in the United States is defined by the Bureau of Labor Statistics as “a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.” The CPI is a statistical estimate constructed using the prices of a sample of representative items whose prices are collected periodically. It is one of several price indices calculated by most national statistical agencies. The annual percentage change in a CPI is used as a measure of inflation. A CPI can be used to index (i.e., adjust for the effect of inflation) the real value of wages, salaries, pensions, for regulating prices and for deflating monetary magnitudes to show changes in real values. In most countries, the CPI is one of the most closely watched national economic statistics.
Consumer confidence is an economic indicator which measures the degree of optimism that consumers feel about the overall state of the economy and their personal financial situation. How confident people feel about stability of their incomes determines their spending activity and therefore serves as one of the key indicators for the overall shape of the economy. In essence, if the economy expands, causing consumer confidence to be higher, consumers will be making more purchases. On the other hand, if the economy contracts or is in bad shape, confidence is lower, and consumers tend to save more and spend less. A month-to-month diminishing trend in consumer confidence suggests that in the current state of the economy most consumers have a negative outlook on their ability to find and retain good jobs.
The ability to predict major changes in consumer confidence allows businesses to gauge the willingness of consumers to make new purchases. As a result, businesses can adjust their operations and the government can prepare for changing tax revenue. If confidence is dropping and consumers are expected to reduce their spending, most producers will tend to reduce their production volumes accordingly. For example, if manufacturers anticipate that consumers will reduce retail purchases, especially for expensive and durable goods, they will cut down their inventories in advance and may delay investing in new projects and facilities. The government will get ready for the reduction in future tax revenues. On the other hand, if consumer confidence is improving, people are expected to increase their purchases of goods and services. In anticipation of that change, manufacturers can boost production and inventories. Large employers can increase hiring rates. Government can expect improved tax revenues based on the increase in consumer spending.
Consumer confidence is formally measured by the Consumer Confidence Index (CCI), a monthly release designed to assess the overall confidence, relative financial health and spending power of the US average consumer. The CCI is an important measure used by businesses, economic analysts, and the government in order to determine the overall health of the economy (see ).
Companies doing business outside of the US should be aware that the political environment can differ greatly.
Give examples of how government policies can influence marketing programs
- Government regulations affecting business and marketing are often much more invasive abroad. Regulations on pricing, hiring, production, and environmental regulation will likely differ from those in the US.
- Most Western countries have entered into regional trading agreements such as NAFTA, or those governing the EU. Companies doing business in these countries should expect to face regulations such as trade barriers, tariffs, etc. depending on where they are trading from and to.
- Monetary and political stability are also key factors that multinationals should take into consideration. Political instablity carries a set of risks, such as expropriation.
- tariff: A system of government-imposed duties levied on imported or exported goods; a list of such duties, or the duties themselves.
- expropriation: The act of expropriating; the surrender of a claim to private property; the act of depriving of private propriety rights.
- trading bloc: A type of intergovernmental agreement, often part of a regional intergovernmental organization, where regional barriers to trade, (tariffs and non-tariff barriers) are reduced or eliminated among the participating states.
The Political Environment
The political environment in countries throughout Europe and Asia is quite different from that of the United States. In the U.S., government intervention in marketing tends to be relatively minimal compared to other countries.
The U.S. is capitalist society, it operates an economic system where both the government and private enterprise direct the economy. In other words, the U.S. government combines free enterprise with a progressive income tax, and at times, steps in to support and protect American industry from competition from overseas. For example in the 1980s the government sought to protect the automobile industry by “voluntary” export restrictions from Japan.
Nevertheless, governments outside the U.S. take this involvement one step further by influencing marketing programs within organizations in the following ways: contracts for the supply and delivery of goods and services; the registration and enforcement of trademarks, brand names, and labeling; patents; marketing communications; pricing; product safety; and environmental issues.
Business activity tends to grow and thrive when a nation is politically stable. Although multinational firms can still conduct business profitably, political instability within countries negatively affects marketing strategies.
The exchange rate of a particular nation’s currency represents the value of that currency in relation to that of another country. Governments set some exchange rates independently of the forces of supply and demand. If a country’s exchange rate is low compared to other countries, that country’s consumers must pay higher prices on imported goods. Exchange rates fluctuate widely and often create high risks for exporters and importers.
Trading Blocs and Agreements
US companies make one-third of their revenues from products marketed to countries in Asia and Latin America. The North American Free Trade Agreement (NAFTA) also boosts export sales by enabling companies to sell goods at lower prices due to reduced tariffs.
Regional trading blocs represent groups of nations that join together and formally agree to reduce trade barriers among themselves. NAFTA is such a bloc. Its members include the US, Canada, and Mexico. No tariffs exist on goods sold between NAFTA member nations. However, a uniform tariff is assessed on products from unaffiliated countries. In addition, NAFTA seeks common standards for labeling requirements, food additives, and package sizes.
One of the results of trade agreements like NAFTA is that many products previously restricted by dumping laws – laws designed to keep out foreign products – can be marketed. Dumping involves a company selling products in overseas markets at very low prices, with the intention to steal business from local competitors. These laws were designed to prevent pricing practices that could seriously harm local competition, as well as block large producers from gaining a monopoly by flooding markets with very low-priced products and raising those prices to very high levels.
Almost all the countries in the Western hemisphere have entered into one or more regional trade agreements. Such agreements are designed to facilitate trade through the establishment of a free trade area customs union or customs market. This eliminates trade barriers between member countries while maintaining trade barriers with non-member countries.
The most common form of restriction of trade is the tariff, a tax placed on imported goods. Customs unions maintain common tariffs and rates for non-member countries. A common market provides for harmonious fiscal and monetary policies while free trade areas and customs unions do not.
Protective tariffs are established in order to protect domestic manufacturers against competitors by raising the prices of imported goods. Not surprisingly, US companies with a strong business ties in a foreign country may support tariffs to discourage entry by other US competitors.
Expropriation occurs when a foreign government takes ownership of plants and assets. Many of these facilities end up as private rather than government organizations. Because of the risk of expropriation, multinational firms are at the mercy of foreign governments, which are sometimes unstable and can change the laws they enforce at any point to meet their needs.
Companies must abide by existing laws and regulations when doing business in a country; these laws may influence marketing activities.
Discuss the various legal issues that impact marketing decisions
- Product liability means that producers of products are held responsible for upholding the safety of that product for consumers. Lawsuits and settlements incentivize producers to ensure defects are minimized and safety is maintained.
- Deregulation of the airline industry has lead to increased competition and service and decreased prices (see. Deregulation of electricity in California led to price hikes and was considered harmful.
- Companies must also pay attention to existing state laws, government relationships, social legislation, federal legislation, and monetary and fiscal policies.
- product liability: the idea that manufacturers of products are responsible for the safety of that product, which may be compromised due to defect or every day use.
- legislation: Law which has been enacted by legislature or other governing body
- deregulation: The process of removing constraints, especially government imposed economic regulation.
Every marketing organization’s activities are influenced by legal factors that establish the rules of the game. These laws, agencies, policies, and behavioral norms are established to ensure that marketers compete legally and ethically in their efforts to provide want- and need-satisfying products and services. The various US legal issues of which marketers must be knowledgeable include the following:
- Monetary and fiscal policy: Marketing decisions are affected by factors like tax legislation, money supply, and the level of government spending. The tendency of a Republican Congress to spend on defense materials and not on the environment is an example.
- Federal legislation: Federal legislation exists to ensure such things as fair competition, fair pricing practices, and honesty in marketing communications. Anti-tobacco legislation affects the tobacco and related industries, for example.
- Government/industry relationships: Agriculture, railroads, shipbuilding, and other industries are subsidized by the government. Tariffs and import quotas imposed by the government affect certain industries (e.g.automobile). Other industries are regulated, or no longer regulated, by government (e.g. rail, trucking, and airlines). Deregulating the utilities industry had a tremendous negative effect on the Californian power industry in 2001.
- Social legislation: Marketers’ activities are affected by broad social legislation, like the civil rights laws, programs to reduce unemployment, and legislation that affects the environment (e.g. water and air pollution). The meat processing industry has spent billions of dollars trying to comply with water pollution legislation.
- State laws: State legislation affects marketers in different ways. For example, utilities in Oregon can spend only ½ per cent of their net income on advertising. California has enacted legislation to reduce the energy consumption of refrigerators and air conditioners. In New Jersey, nine dairies have paid the state over $2 million to settle a price-fixing lawsuit.
- Regulatory agencies: State regulatory agencies, for example, the US Attorney General’s Office, actively pursue marketing violations of the law. Federal agencies like the US Federal Trade Commission and the Consumer Product Safety concern themselves with all facets of business.
Every facet of business is affected by one or more laws. We will briefly discuss the three areas receiving the most notice in marketing: product liability, deregulation, and consumer protection.
The courts are increasingly holding sellers responsible for the safety of their products. The US courts generally hold that the producer of a product is liable for any defect that causes injury in the course of normal use. Liability can even result if a court or a jury decides that a product’s design, construction, or operating instructions and safety warnings make the product unreasonably dangerous to use.
Many feel that product liability law is now as it should be—in favor of the injured product user. Consumer advocates like Ralph Nader argue that for too long, product liability favored producers at the expense of the product user. Advocates claim that the threat of lawsuits and huge settlements and restitution force companies to make safe products.
Deregulation means the relaxation or removal of government controls over industries that were thought to be either “natural monopolies,” such as telephones, or essential public services like airlines and trucking. When regulated, industries received protection from renegade competition.
Insulated from competition, regulated industries in the past often had little reason to lower costs; they concentrated on influencing the regulators to make favorable decisions. There was an unhealthy tension and costs rose, industries sought price increases, and regulators resisted, often depressing industry profits. That, in turn, reduced new investment and perpetuated high costs and poor service.
Industries such as the airlines, banking railroads, communications, and trucking have long been subject to government regulation. A market place shock wave hit these industries as they were deregulated. Each of these industries saw the birth of many new competitors attempting to take advantage of market opportunities uncovered by deregulation. The result was that competition intensified, prices were lowered, and many once-stable organizations suffered huge financial losses.
As new competition was permitted, and rate regulation was loosened or abandoned, the vicious cycle began to reverse itself. For example, airlines, once freed of restrictions, organized “hub and spoke” systems–outing passengers via major transfer points that provided more connections. In 1978, about 14 per cent of all passengers had to change airlines to reach their destination; by 1995, this number fell to about 1 per cent.
Since the beginning of the 20th century, there has been a concerted effort in the US to protect the consumer. Perhaps the most significant period in consumer protection was the 1960s, with the emergence of consumerism. This was a grassroots movement intended to increase the influence, power, and rights of consumers when dealing with institutions.
Marketers must always be aware of applicable legislation to avoid running foul of the law and incurring heavy fines, payouts and settlements.