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Tuesday, August 6, 2013

Price hikes from the emerging middle class - How giving your child allowance can pay off

Price hikes from the emerging middle class

Consumers trying to keep their budgets balanced will be dismayed to find that keeping up with the Joneses is getting pricier as the global middle class expands.

Economists generally consider the middle class to be those consumers with enough financial resources to make discretionary and small luxury purchases—such as an automobile or concert tickets. By that broad brush, about 2 billion people worldwide qualify, said Jack Plunkett, chief executive of Plunkett Research.

By 2030, that number will balloon to 5 billion, with many of the newcomers hailing from developing countries such as India, China and Brazil.

Collectively, consumer spending in Brazil, Russia, India and China accounted for 8.1 percent of global gross domestic product in 2010,according to IHS Global Insight. By 2015, it is expected to reach 12 percent. U.S. consumption as a percentage of GDP peaked at 22 percent in 2002, and by 2015 is expected to be roughly 14 percent.

That emerging middle class pushes prices higher, simply because there are more people vying for resources. Rising wages, which help create a middle class, also inflate prices because goods are more expensive to produce, Plunkett said. "The long-term effect is going to be pretty dramatic," he said.

Consumers are likely to notice first—and may have noticed already—on basic expenses such as groceries and gasoline.

"When people get a higher income, they want to eat more meat," said Chris Christopher, an economist with IHS Global Insight. Prices for a pound of ground chuck are up 20 percent over five years, according to the Bureau of Labor Statistics, while whole chicken is 28 percent pricier over the same period.

In some cases, surging demand contributes to temporary shortages. That has happened recently with Chinese demand for baby formula, and a few years ago with global demand for rice, said Teri Gault, chief executive of

The effect of the new middle class isn't limited to staples. It has even pushed the needle on more luxury items such as designer fashion and premium alcohol. Commodities including diamonds and gold have also been affected, although global economic woes have put a temporary damper on the trend, said Plunkett.

Diamond prices are as much as 2 percent lower in 2013,due to reduced demand from India and China, according to brokerage firm ConvergEx.

U.S. consumers may also find themselves playing second fiddle to the emerging middle class in developing countries. Those first-time buyers provide a unique opportunity for manufacturers of everything from automobiles to cell phones to lock in brand loyalty, Christopher said. "Major corporations are taking notice of the global consumer rebalancing," he said. "They'retrying to maximize sales."

That's likely to mean more products designed with that audience in mind, or that debut abroad before arriving in the United States. In 2011, Dell, for example, launched its XPS 14Z laptop in China a month before it arrived stateside. "This is unheard of before," he said. "It's a pretty strong shift."

Source:'s Kelli B. Grant and

How giving your child allowance can pay off

School may be out, but never fear—there are plenty of teachable moments to be had when it comes to kids' financial literacy.

There are lawns to be mowed and summer jobs to be had—but parents also can go a long way toward helping children learn about money with a simple tool: the allowance.

"From my point of view, allowances should be required. You want kids to get comfortable with money," said Nathan Dungan, president of Share Save Spend, an organization aiming to help people develop healthy financial habits. "It gives a really critical structure and kind of intentional marking point that a child develops to get them comfortable with money."

Dungan suggests starting an allowance when a child is just 5 or 6, increasing the amount each year. "It's a great opportunity to delve into it, transfer some responsibility and work on things like deferred gratification," he said.

Tying an allowance to chores diverts the focus on to the completion of the work, Dungan adds, so he recommends straight cash. And rather than just handing out money, he says an allowance should be a springboard for conversations about spending, saving and giving—and that kids should be taught to do all three.

This time of year, Dungan says parents can try giving teens responsibility for back to school shopping. He suggests giving a teen a budget—whatever you are allocating for fall clothes and school supplies—and tell him or her to figure out how to make it work by shopping around and deciding what's necessary and what's not.

"A lot of things you're spending money on for your kids, there's no reason you can't have your kids do that," he said. Allowances, he said, "transfer accountability and responsibility."

Others, though, beg to differ. Lewis Mandell, the former dean of SUNY Buffalo's business school and a financial literacy expert, has researched the impact of allowances on financial behavior later in life, and says the results are troubling.

His initial premise, he said, was "that kids who had a regular, nonconditional allowance, who could reasonably budget their allowance, would probably have the highest financial literacy scores," he said. "Well, it turned out they had the lowest."

Kids who received an allowance in exchange for chores scored slightly better, but the top performers never had allowances.

The pattern continues into adulthood, Mandell says. Studies by fellow researchers "showed that kids who got regular allowances were less likely to value the inherent nature of work. They were more likely to be what we would call slackers."

The good news, Mandell says, is that the solution to the problem is simple. If parents communicate with kids about the allowance, and explain the importance of saving and deferred gratification, those few dollars per week can provide an important life lesson.

"When kids don't have the opportunity to interact with their parents and learn about their obligations as a citizen of the household, then they lose out," he said. But "some of these interactions can be very valuable."

Mandell also advocates allowances tied to chores. "Associating payment with the performance of certain work is setting in my mind what is a useful association," he said.

And for older teens, Mandell says being responsible for back to school shopping or a clothing allowance can be terrific, potentially teaching them how to budget and save and hold off on impulse shopping.

Be careful, though. If your child runs through the money, you may feel compelled to bail them out—and then the lesson is lost. "An awful lot of it," Mandell said, "is sticking to your guns."

Source: CNBC's Kelley Holland and