Breakfast Cereal Economics 101

Yesterday evening I happened to be in the gym while the NBC nightly news was playing on a  screen above my treadmill.  A video of the segment is embedded below.

The premise of the story is that the price of breakfast cereal is on the rise.  As the reporter put it, "sticker shock in the cereal aisle.  The morning staple is getting more expensive."

The story reported that over the past five years, the price of a pound of cereal has increased $0.20 to $3.09.  That doesn't seem like an enormous increase to me.  That works out to a 6.9% price increase over 5 years - or just a 1.4% increase per year (if the price of cereal rose at the same pace as the overall rate of inflation, we'd expect it to have risen by roughly the same amount as it actually has over the past five years).  But, let's leave that aside for now.  I want to focus on the economic arguments made in the piece.

The story says that consumption is down 7% over the same time period.  So far so good.  Prices rise, consumption falls, showing the demand curve is downward sloping.  In econ-speak, we'd say there was a movement along the demand curve.

Where the story runs off the rails is when trying to discuss the causes of the price "spike".  They say "shoppers are looking for healthier and faster food.  They've gone to Greek yogurt, they've gone to power bars, . . ."  The story talks about cereal brands trying to become healthier by adding fiber and cutting sugar.  Then the key phrase at the 1:33 mark:

As the demand for cereal falls . . .

Here's the problem: as we teach in Econ 101, if the demand curve falls (or shifts inward) because of health concerns or change in the price of substitutes then the price will also fall.  But, the whole NBC story was motivated by the fact that cereal prices are rising not falling.

Unless something is happening on the supply-side, falling demand cannot occur at the same time as rising prices.  Either NBC got the facts wrong (cereal prices aren't falling in real terms) or they got the explanation wrong (cereal demand isn't falling but rather the supply curve was shifting).  I suspect the they also did what a lot of students in our intro classes do: they confused a movement along the demand curve for a shift in the demand curve.   

Consider this a friendly lesson in cereal economics 101.