📎The ratchet effect is an economic term that describes the tendency for prices to rise rather than fall, even when the factors that caused them to rise weaken. This phenomenon can be compared to a ratchet mechanism in technology, which allows movement to occur in only one direction - forward, preventing reverse movement.
⚡️In economics, it looks like this: when companies raise prices in response to rising costs or inflation, they may not lower them back even if costs fall. Instead, prices remain at the new, higher level
Why aren't prices going down⬇️
▪️Inflation expectations.
When inflation dominates the economy, companies factor in future cost increases into their prices;
▪️Consumer psychology.
Consumers may view price cuts as a sign of a decline in a company's quality or reputation;
▪️Need for compensation for losses.
Following periods of rising costs, companies may use higher prices to offset previous losses associated with economic instability;
▪️Menu-costs.
Price reductions also involve administrative and marketing costs: companies need to revise contracts, change price tags and advertising campaigns.
The ratchet effect is clearly visible in the markets of raw materials or precious metals. After the price of raw materials rises, producers can keep the prices of the final products at a high level even when the cost of raw materials falls, which is important to consider when evaluating the shares of such companies. This effect creates conditions for more stable growth of company income, which is important when choosing assets for long-term investment.
