Getting the most out of a toaster

Those in the market for a new household toaster are spoiled for choice.  There are colours and styles to suite all tastes and budgets; from the cheapest Sunbeam at around $10, right through to the epically-priced Bosch Porsche for over $200.

If the kids are showing a ravenous appetite for hot-buttered, jam-covered toast, you might splash out on a hardwearing, daily work-horse for around $75. If it lasts two years and you make five to six slices a day, then that works out at about 1.8 cents a slice.

You might think that investment is worthwhile as you’ll get a lot of heavy use out of it.

Then little Susie develops a gluten allergy and little Timmy decides that he prefers soya instead and your super-charged machine sits idle in the corner, collecting dust.

Once a week you and the spouse sit down for a quiet breakfast together and you reflect that each slice now costs you in the region of 40 cents.

But toast is still toast.  The amount of labour required to produce one slice in an eight-slice toaster is the same.  If you were selling toast, you would find resistance to increasing the price to make up for the lower demand.

Over the past five years, the economy steamed ahead.  Investors and business owners looked at the increasing demand and put their faith in expensive toasters.  During 2007 to 2008, at the height of the consumer bubble, Producer Price Inflation (PPI) rose by well over 10%.

PPI is the change in prices as experienced by manufacturers and producers. Consumer Price Inflation (CPI) is what you experience at the supermarket.

CPI and PPI don’t have to be in alignment.  In fact, CPI has been much lower than PPI.  When PPI hit its peak of 19.1% in August 2008, CPI was at 13.7%.  Since then, PPI has plunged to -4.1%, while CPI is holding at 6.9%.

What does any of this mean?  How can production prices rise higher than consumer prices, and why aren’t falls passed on in falling prices?

Inflation is a measure of efficiency.  Growing factories take on more staff, increasing their payroll costs, equipping those staff, increasing their investment costs.  This increases their overall cost of production.  They may not pass all those increases on to their clients, but they do feel them.  Then, when demand drops, they’ve got too many staff and too much idle capacity.

A factory has a small range of choices with regards to financing the difference between the price increases consumers are willing to bear, and the costs they have to take on to stay in business. 

They can borrow money which, in a boom, they are willing to do, and so carry the immediate costs into the future.  Or, if the cost of production really must fall, then they have to fire staff and get more out of the people they have left.

The economy has shed over half a million jobs since the beginning of the year, and the downturn has a way to go yet.  Companies will start returning to profitability long before they start hiring and investing.

This credit crisis will also have a tremendous impact on the future of work.  Given their experiences with massive changes in demand, investors are going to look for efficiency gains wherever they can.

Entire industries are now facing the cudgel.  Future factories are going to be smaller, more technologically-driven and employing ever-fewer, ever more highly-skilled workers.

President Jacob Zuma’s first 100 days were peppered with promises about job creation.  The skill-base for the majority of workers is too low to fill these new jobs.  It is time for him to be honest with people.  Skills do not fall from the sky like dandruff.

If the jobs of the future are ever to happen, we better focus on the education of today.