Can Companies Pass Along Commodity Price Increases?


The squeeze on margins caused by rising commodity prices, combined with price sensitive consumers has created an inability for companies to raise prices. That was the subject of this week’s most overlooked WSJ article.

We’ve discussed this in the past. Its an issue with implications for corporate profits, which have been healthy, and corporate hiring, which has been lackluster.

Creeping inflation, anyone?   

Wsj_121304_economy12122004181027_1WSJ:  "U.S. companies are beginning to pass along rising raw-material costs to business customers, increasing the risks of more inflation. So far, though, many businesses are finding it hard to pass the price increases on to consumers. (emphasis added)

By making productivity improvements and accepting thinner profit margins, producers have absorbed most of rising costs of steel, plastic and natural gas without passing them along this year . . . Indeed, the government reported Friday that producer, or wholesale, prices for finished goods rose 0.5% on a seasonally adjusted basis in November, after rising 1.7% in October and 0.1% in September. Much of the October and November increases reflected higher oil prices. Excluding volatile food and energy items, producer prices rose 0.2% in November, following three consecutive months of 0.3% increases.

During the past year, producer prices for finished goods have risen 5%, the Labor Department said. Excluding food and energy, they have risen 1.9% over the past year compared with 0.5% in the previous 12 months."

We’ve said this several times previously, but it bears repeating: The inflation rate ex food and energy is a useless measure of price increases. If your concern is volatility, use a moving average. Otherwise, the 2% rate is an utterly useless measure of inflation.

Imagine a hospital declaring, "ex-breathing and heart rate, the patient’s vital signs are terrific." Well, how is he doing? He’s dead, but ex-breathing and heart rate . . .

Silly, but its become an economic convention. Especially when one considers the government’s obligation’s tied to inflation rate (Social Security, et. al.). That apparent conflict of interest notwithstanding, the so called core-inflation rate has become more or less worthless.

Here’s an excerpt from the Journal:

A growing number of Federal Reserve officials believe inflation risks are on the rise. That shift in sentiment likely will keep the central bank raising interest rates at its next few meetings. Since June, the Fed has raised its target for the federal-funds rate — charged on overnight loans between banks — to 2% from 1%. Economists expect the Fed to move the rate to 2.25% at its meeting tomorrow, and to 2.5% in early February. . .

Intense global competition from China and other low-cost producers limited the ability of many companies to pass higher costs on to customers. Labor costs have been more contained thanks to productivity improvements, though these costs are also inching higher. And healthy profit margins have given companies leeway to absorb higher costs.

"While competition limited the ability of producers to pass higher costs forward, several districts noted that some industries were successful in passing along cost increases," though more so to other businesses than to consumers, the beige book said.

Talk about late to the party: In December 2004, Federal Reserve officials believe "inflation risks are on the rise" ? Shouldn’t that read: Federal Reserve officials believe inflation has been rising for the past 30 months . . . ? As the Labor Department chart above shows, finished goods prices have been rising since early 2002. 

Pressure Mounts to Increase Prices
Rising Raw-Material Costs Are Passed On to Businesses;  Consumers May Be Next
THE WALL STREET JOURNAL, December 13, 2004; Page A3,,SB110268393823196806,00.html

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