A Rock and a Hard Place
WSJ - AHEAD OF THE TAPE
By JUSTIN LAHART
December 17, 2004; Page C1
Viewed through the prism of today's report on consumer prices, last
year's deflation worries will seem a bit quaint.
Economists expect that the Labor Department's consumer-price index
will show a 0.2% gain for November, a move that would put it 3.6%
over last year's level -- the biggest year-over-year increase in
more than three years. Another upside surprise such as October's,
when the index rose 0.6%, and the CPI would show its biggest
increase over year-ago levels since 1991.
Even if it posts another unexpected jump, the CPI's gains would fall
well short of the rise in wholesale prices. Last week, the producer-
price index showed a year-over-year rise of 5% -- the biggest
increase since 1990.
Caught between CPI -- the prices that consumers pay for stuff -- and
the PPI -- the prices that companies pay for stuff -- are earnings.
With the PPI increases running ahead of the CPI gains, profit
margins are coming under pressure.
There hasn't been any contraction in profit margins. To the
contrary, thanks to companies' efforts to hold down costs such as
labor -- far greater than the cost of materials -- profit margins
are as wide as they have been in nearly 40 years.
If the job market continues to improve, however, giving workers
better leverage in wage negotiations, margins will contract. At the
same time, many companies have been complaining of high materials
costs. Manufacturers heavily dependent on materials from the earlier
stages of processing than the finished goods measured in the PPI's
headline number have been particularly hard hit. The PPI for
intermediate goods was up 9.8% over year-earlier levels in November.
Thanks mostly to surging oil prices, the PPI for crude goods was up
25.5%.
Eugene Flood, head of institutional asset-management firm Smith
Breeden Associates, points out that periods when gains in the PPI
have been outstripping gains in the CPI haven't been happy events
for the economy -- and actually have been a good recession signal
during the past 30 years. This may be because companies reacted to
pressures on profit margins by cutting back on production growth and
expansion plans, which is a sensible response to being less well-
compensated for taking on risk.
Mr. Flood doesn't reckon on a dire slowdown this time around, but he
does think shrinking profit margins are one reason the economy will
run cooler in 2005 than it did in 2004. |
