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Companies are adjusting their prices for costs { March 25 2005 } Original Source Link: (May no longer be active)
http://www.iht.com/articles/2005/03/24/business/prices.htmlhttp://www.iht.com/articles/2005/03/24/business/prices.html
U.S. companies are shifting more of their costs to consumers
By Eduardo Porter The New York Times
Friday, March 25, 2005
Until recently, most companies operating in the U.S. market were forced to absorb the higher costs of basic expenses like employee health care, raw materials and energy, focusing instead on squeezing more efficiencies from their workers and machines.
But now, from airlines to manufacturers of advanced plastics, many businesses are overcoming their fear of losing customers and are starting to pass on cost increases to their customers.
After two months of virtually no inflation, the U.S. Labor Department reported Wednesday that the Consumer Price Index jumped 0.4 percent in February, the fastest pace since October.
Surging oil prices contributed substantially to the increase last month. But other prices also rose broadly, pushing the core Consumer Price Index - a less volatile measure that excludes food and energy - up by 0.3 percent, the sharpest increase since September.
The report came a day after the Federal Reserve, in raising interest rates for the seventh time in less than a year, expressed greater concern about the risk of higher inflation, citing evidence that some businesses are gaining increased "pricing power" in the marketplace.
Including energy and food costs, average prices are now 3 percent above where they were a year earlier. And some consumer prices have risen even faster.
Medical costs are 4.3 percent higher than a year ago; hotel rates have gained 7.3 percent; prices of dairy products are up 5.6 percent. Excluding food and energy, consumer prices rose by 2.4 percent in the 12 months to February - the fastest pace since the summer of 2002.
"There seems to be a great deal of cost pressure," warned Richard DeKaser, chief economist of the banking company National City, based in Cleveland. "Producer prices are rising faster and import prices are rising faster. These inflationary pressures are working their way through."
But worries about inflation in U.S. financial markets were tempered by a sharp slide in oil prices to below $54 a barrel on Wednesday, as the Energy Department reported that weekly crude inventories in the United States rose to their highest level since the summer of 2002. Indeed, the value of the dollar against the euro and the yen rose Wednesday in currency markets, with investors betting that the Fed's tougher language suggests it might be more aggressive about fighting inflation with higher interest rates.
In the bond market, the benchmark 10-year Treasury bond, after initially falling in value as yields rose, ended trading in New York up slightly, with the yield slipping to 4.59 percent from 4.64. On Wall Street, stocks were mixed, with the Standard & Poor's 500 index and Nasdaq composite both up, while the Dow fell slightly.
Inflation has been slowly building for many months. Import prices have risen over the past two years, as the dollar has declined against other major currencies, relieving some pressure on domestic manufacturers to keep prices down.
Moreover, from the price of raw materials, which have risen 11 percent over the past 12 months, to the price of finished products at the factory gate, up 5 percent, producer prices have been rising considerably faster than the Consumer Price Index. Now, with a strengthening U.S. economy both domestically and abroad lifting demand across the board, companies are finding it easier to raise prices again.
"It's the revenge of the business cycle," said Richard Hoey, chief economist of Dreyfus, a mutual fund company. "With the Fed funds rate at a multi-decade low - after a massive fiscal stimulus and after driving down the dollar for the past three years - how shocked can you be that there is an upward shift in inflation?"
Most American businesses had for some time been unable to pass on cost increases to consumers because there still was plenty of spare capacity and they were facing relentless competition from factories in cheap-labor countries like China and India.
As robust demand growth has pushed the unemployment rate down and capacity utilization up, businesses have recovered some of their pricing power.
"With fewer spare workers and less spare capacity, the trade-off between making more stuff and raising prices starts to change," said Andrew Tilton, an economist at Goldman, Sachs.
Indeed, a U.S. survey of small and mid-sized businesses in February by PNC Financial Services Group found that half planned to pass on cost increases to their customers, double the proportion that did two years ago.
"Everybody in the lighting industry is passing on cost increases," said Emma Price, owner of a lighting business in New York.
And price increases are sticking. "These forces are operating on so many competitors. When one raises prices others follow," said Stuart Hoffman, PNC Financial's chief economist.
Take Pacific Plastics and Engineering, a maker of high-tech plastic parts for medical devices and other precision equipment in Soquel, California. Despite double digit increases in the cost of plastic resins over the last 18 months, the company kept prices flat, said Stephanie Harkness, chief executive of the company. "You bite the bullet to ensure customers are not going to walk," she said.
To protect its margins, the company squeezed efficiency from its workers, making the most out of its enterprise planning software. It required employees to shoulder a greater share of health insurance premiums.
But eventually, Harkness said, "you reach a point where you're as lean and mean as you can be." By mid-April Pacific Plastics will have completed a broad evaluation of its pricing, and plans to pass on cost increases to some customers.
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