What Do Coca-Cola and Reese’s Peanut Butter Cups Have in Common?

Your Reese’s Peanut Butter Cup just got thinner. Because of higher freight and ingredient costs, Hershey’s had to shrink them by 40%.

The social media reaction:

Also because of higher costs, renovating your kitchen, drinking a Coke, and sneezing into a Kleenex tissue, will be more expensive.

Some other price increases:

Why?

A slew of cost increases are nudging prices skyward. In addition to a truck driver shortage that drove up transport expenses 7%, private sector wages and salaries rose 3.1% from 12 months ago. Responding to tariffs, manufacturers are paying 8% more for aluminum and 38% more for steel. Then there’s that 10% tariff that could be added to $200 billion of Chinese goods. And during the past year, WTI (West Texas Intermediate) oil prices have ascended from approximately $50 a barrel to as much as $75. WSJ tells us that the only offset could be a stronger dollar that makes imports relatively cheaper.

Our Bottom Line: Price Signals

As prices start to march upwards, they will be sending us some signals.

Higher oil prices can convey a message through our local gasoline station that tell us to carpool more, move closer to the office, or purchase a hybrid vehicle. Here though it gets a bit more complicated. Based on the law of demand, higher prices encourage us to buy less. As economists though we should also recall that it all depends on our elasticity. How much does buying “stretch” when prices drop and contract when they rise? If the answer is “a lot,” then we have elastic demand for that item at a certain price. On the other hand, when a price change has little impact, then our purchasing behavior is inelastic.

For gasoline, there is considerable disagreement. The BLS suggests that our demand is inelastic for gasoline. However,  these scholars and others like them believe the opposite.

It’s interesting that Reese’s Peanut Butter Cups have the characteristics we associate with inelasticity. They have no substitutes; they are inexpensive; they are a necessity.

My sources and more: Thanks to WSJ, here, here, here, and here for lots of facts about consumer goods price increases. However, if you read just one article, do go to BusinessInsider to see people’s rage over a thinner Reese’s Peanut Butter Cup.

Please note that Coca-Cola has not yet announced the precise Coke price hike.