Price claim

Recently the British Financial Times claimed that the price of raw coffee accounts for between 66% and 75% of the cost of instant coffee in shops. Early in 1976 the price of a 4oz jar of instant coffee was 40p. It requires about 10oz of raw coffee to make a 4oz jar of instant coffee. A rough estimation shows that the price of raw coffee accounted for only 35% of the cost of the 4oz jar sold in a British supermarket.

At today's sky-high prices raw coffee probably accounts for 30%-35% of the final processed coffee price.

This is a clear example of the inflationary ratchet effect outlined by Kaldor and Green in their recent article. Consumer prices shoot up in response to a shift in supply. But when normal market conditions reassert themselves, and commodity prices fall back to something like their previous level, the cost determined price of manufactured coffee fails to demonstrate a similar downward movement.

This has a double effect. Firstly, it continues the inflationary pressure on consumer prices (and therefore maintains wage demands) in industrialised countries. Secondly, it ensures that the disparity in price between manufactured goods and commodities is maintained. Coffee exporters, therefore, find the real value of their exports are declining in the face of the continued inflationary cost of manufactured goods.