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The humble egg has scrambled America’s nerves. Prices have more than doubled over the past year, to about $7.75 a dozen. The most obvious reason for this is the spread of avian influenza, which has affected more than 50mn chickens since November, equivalent to one in seven of the country’s egg-laying flock, according to US Department of Agriculture numbers.
There’s another reason too: not scarcity but elasticity, or the lack of it. Eggs often pop up in economics classes as an example of goods that are price-inelastic. In other words, a large increase in price doesn’t create a similarly large decrease in demand. Some studies have determined that in theory, if egg prices rise by 1 per cent, demand falls by just 0.27 per cent.
That checks out. Eggs aren’t really like other kinds of food. They’re an essential part of the American brunch. As protein sources go, they’re relatively cheap. Cocoa is another inelastic foodstuff that has rocketed in price in recent months. Poor harvests in West Africa are one factor in what promises to be an expensive Valentine’s Day.
Inelasticity has become an investment trend too. Think of Nvidia, the chipmaker whose silicon drives the artificial intelligence boom. While the supply of chips is rising, demand among Silicon Valley customers is rising faster — at levels chief Jensen Huang describes as “insane” — with price as an afterthought. That’s reflected in Nvidia’s enormous, monopolist-like profit margin and, in turn, in the near-doubling of its shares in a year.
Some items enjoy low elasticity for reasons harder to pinpoint. Netflix accounts are one example. The digital streaming company managed to buck the traditional laws of supply and demand by raising prices several times, seemingly with no impact on viewer appetite. Walt Disney has had less luck raising prices of its Disney+ offering — subscriber numbers fell by 700,000 in the latest quarter.
Some researchers argue that inelasticity is actually becoming a feature of the stock market. One possible culprit is the rise of passive investors like index trackers. These take in customers’ money and buy stocks regardless of their price. Finance professor Valentin Haddad suggests other investors haven’t countered that impact effectively, and that stocks have become 11 per cent less elastic as a result of passive investing. A wave of retiring boomers could, of course, cause that trend to go into reverse.
Back in the real world, eggflation will abate, eventually. Farmers continue to hatch new laying hens, although these take several months to reach maturity, and flu still stalks the flock. States like Nevada may relax restrictions on eggs from caged chickens, happily for shoppers if not the birds themselves. For now, inelasticity remains on the menu, and it’s best served with a side of patience.
john.foley@ft.com
