Pricing power gap is cause for worry
wvec.com
There's no subject that generates more ire from readers than inflation.
Either I offend households buckling under the strain of price increases for life's necessities, such as utilities, or, I peeve the business folks who've tried and failed to raise prices. They've been defeated by resistance from customers who can't pay up for their goods and services.
These equally disgruntled groups illustrate a different sort of class divide — the pricing power haves and have-nots.
A J.P. Morgan senior economist recently explored this paradox in a short piece titled, "When the CPI Isn't About Inflation."
Energy prices, he noted, are up by 52 percent in the last two years. Compare that to the annual growth in the consumer price index, which had crept up to 2 percent from 1 percent in 2003, but has since started falling again.
"Imagine what inflation trends would be if energy prices had been stable," Mr. Glassman suggested.
To satisfy his imagination, Mr. Glassman calculated that CPI growth would be close to zero by now if not for energy.
Deflation fears
Take it out of the picture, along with areas directly affected by higher energy prices, such as taxi and air fares, paper products and certain processed foods, and you're flirting with deflation, or falling prices.
"If rising energy prices were the result of strong demand rather than underinvestment by the oil industry ... why is demand not providing the same support for other prices?" he asked.
"Instead, more costly energy is squeezing household budgets, leaving little for other purchases. Many businesses are forced to hold the line because their customers cannot support higher prices."
What's needed to make companies and consumers happy is a surge in demand resulting from a fundamentally stronger economy. That would, in turn, lead to rising inflation-adjusted incomes, not the consumer-spending surge we've seen powered by people sucking every last dime out of their homes.
Far sicker
Like it or not, that's where the Federal Reserve's true dilemma lies. Stagnating prices are indicative of an economy that is far sicker than what meets the eye.
"Inflation low enough that the central bank has no desire to push it lower is one of the most significant economic developments since the end of World War II," Mr. Glassman added.
And that gets us back to the housing market — the economy's main engine of both growth and jobs in the last five years.
Recent data that show a slowing housing sector hold deep implications for the future of inflation. Not only will wages suffer. Like the dot-com industry that created tons of jobs just to take them away, housing will claim a great many casualties in the years to come.
But other business supported by housing will also lose what little pricing power they've had in recent years. To envision what's to come, imagine anything you buy to fill a home. Now picture it on sale. |
