Realist, not conformist analysis of the latest financial, business and political news

Wondering whether an idea is actually correct or not

There’s an idea out there which seems intuitive but then so many ideas do seem that way. It;s whether they actually hold up in reality that matters.

Another way of describing much the same thing is that vast numbers of things happen in an economy and someone will do near anything in response to an incentive change. What matters is what is the balance of all of those changes, that’s what influences reality.

So, imagine that we’re about to enter an age of rising interest rates to deal with that high level of inflation. As we might well be that’s not a bad assumption to start thinking through. This will mean a squeeze on real incomes. So, how will behaviour change at that point?

There’s this idea called the Lippy Effect. When women’s incomes get squeezed then lipstick sales go up. The full pamper of a new outfit and a nice lunch out with the girls cannot be afforded. But at least some pamper can be had by splashing out a few pounds on a new lipstick. So, times get hard, more lipstick is sold.

I’ve seen it said that this is true and can vaguely recall someone saying that no, it’s not. It’s a story not a truth.

But if it is a truth does it then extend further? Would it extend to booze companies like Diageo for example?

The observation being that we all desire a little luxury, a little pampering, and if we can’t have it on big and major things then we’ll take a little bit of it by buying smaller yet premium items. It’s easy enough to see how this could happen with spirits. That luxury of better whisky for a few pounds more when the tens or hundreds of pounds to spend aren’t available.

Well, maybe I guess. Although I rather wish we weren’t about to find out.