Price: An Economic Indicator?

Can pricing…

…help us gauge economic recovery?

I believe that pricing is one of the strongest indicators of economic recovery. Why? Because it indicates sellers’ confidence in the marketplace. Here are some recent reports to demonstrate that we’re going to see the recovery accelerate dramatically over the next three to six months:

  • The Washington Post – Kraft Foods increases prices as are General Mills, Sara Lee and Kellogg.
  • BBC – UK food prices soaring
  • Reuters – Starbucks raises targets as traffic, prices rise
  • Reuters – MillerCoors Q3 income ahead as beer prices rise
  • Bloomberg Businessweek – British Airways Posts Profits as Ticket Prices Surge

What I find fascinating in these articles is that many of these companies are in industries in which discounting is used regularly as part of their pricing strategy. Food companies, in particular, are notorious for offering coupons and deals to drive sales, yet now they’re raising their prices.

Even more spectacular is seeing an airline raising prices. What gave British Airways the confidence to raise their prices? According to the Bloomberg Businessweek article, increased demand from business flyers. Similarly, Starbucks increase is driven by increased demand.

Conversely, MillerCoors raised prices despite soft demand according to Reuters. Hmmm, can’t help but wonder how much they could have earned for shareholders if they’d employed this strategy earlier?

My point is that these companies wouldn’t be raising prices unless they were confident that the market is strong enough to weather these increases. Contrast this newly-found confidence with the fact that, at the first sign of the economic downturn, almost every company lowered prices.  The scarcity mentality was a raging wildfire destroying prices and margins to the point that many companies couldn’t survive. Arguably some of them shouldn’t have been in existence anyway.

It’s counter-intuitive, but rising prices is an early indicator that companies and consumers alike have adjusted, psychologically, to the economic realities they face and are able to move forward again. Yes, even in the face of unemployment numbers that have remained static. People adapt.  They find ways to adjust their lives to deal with the realities of the marketplace. Confidence is regained as part of this adaptation. This confidence is what allows companies to feel comfortable raising prices.  The combination of renewed confidence and higher prices will spur hiring which will further accelerate demand for these companies products/services.  The economy is recovering.

As many of you will already have surmised, these price increases can also be an early indicator of the inflation we’re about to face.  Indeed, there is some debate, even within the Federal Reserve Board of Governors, as to whether or not the recent decisions to pump more money into the system vis-a-vis purchases of Treasury debt is going to encourage economic growth or accelerate inflation.

I’m not an economist, but I can’t help but believe that adding money to a system in which price increases are evident, particularly increases in staples like food, is going to do more harm than good.  Fortunately the Fed has a lot of room, given the extremely low interest rates that exist today, to rein in inflation.

If you want to be the Nordstrom of your industry or if you catch yourself thinking “I’m tired of working my tail off without making any money,” call Dale at 314-707-3771.

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3 thoughts on “Price: An Economic Indicator?

  1. Tom Norman

    Dale,

    I am ready to chew the very first part of what you said. Then I will at another reply read the rest.

    Yes, price can be an indicator. However, to me it indicates the weak fall and the strong remain standing. Leadership is survivor-ship in the times of weakest economy.

    The logic is this. If you are up against a wall, and those on your left and right are falling because they don’t have enough margin with the drop off in demand or volume… then what have you to lose by raising your price and getting in margin what you are losing in volume?

    So the strong survive because they can. Whereas if the market is strong, the buildup of a recovery, then smart marketing is to drop margins to get a larger customer share of the soon to be growing market.

    I suspect you will have a lot to say about this contrary view. [And I didn’t read yet the full blog, so I may be jumping to conclusions.]

    But what informs this opinion of mine is the weak after the big shock in the summer of 2008. I went into Home Depot to buy what I had been buying over the past weeks, due to working on property repairs.

    I was shocked to see that instead of dropping the prices, the companies raised prices almost straight across the board.

    Then I reflected, the credit had tightened up. There was no more assumption of rolling loans forward, because the banks for reasons were tightening credit.

    What did it leave them to do but survive by preemptively increasing prices. Those who needed the products were going to buy. And if they needed it then they would pay.

    Please tell me what you think of this thesis.

    TN

  2. Tom Norman

    I have heard it before also how the Fed can reign in inflation. Please say more about how they will reign in inflation since the interest rates are low?

    My concern is the QE, quantitive easing isn’t working. Instead it is putting in more that is going to bubble up commodities and leave our economy to invest in other economies… since our interest rate is so low.

    So if there is inflation And there is not growth — stagnation and inflation — if the Fed raises the interest rates, then it will slow down lending which is already anemic.

    Therefore they will shoot themselves in the foot the second time.

    In other words, may it not be possible that without targeted introduction of money into the economy, the ‘unearmarked QE’ will have already let the genie out of the bottle.

    And it can’t be put back in BECAUSE there is no ‘heated up’ economy causing inflation. There is only ‘slosh’ of QE.

    And secondly there is no heated up economy to slow down, BECAUSE the banks are by nature risk adverse and have to cover their lending with collateral. So they in adverdently discourage borrowing by businesses, necessary to hire and take risks and expand… because for the following reason they are increasing the collateral borrowers have to pledge.

    The reason they have to have borrowers pledge more stuff to borrow is because the housing market is cut at the knees and policies are there to cause its fast recovery.

    And secondly the business climate is in stag-cession. Stagnated in a recession. So the second kind of collateral businesses can pledge to banks is one which has a low resale market now: Who is buying back hoes or forklifts now?

    The borrowers need to pledge more stuff to get the same recovery money to satisfy banks who are risk adverse.

    This is because real estate and business asset markets are still low or dropping and anemic. And therefore the bank’s will not be able to secure their loans without greater pledges of capital.

    So it is all insidious.

    Tom Norman

  3. Dale Furtwengler Post author

    Tom, thanks for your comments. You make a lot of good points. One of the advantageous byproducts of an economic downturn is a better reallocation of resources. As you mentioned, the strong get stronger and the weak don’t survive. Those are strong indicators of what buyers really value since, in difficult economic times, their spending is focused on what they value most. The companies that raised their prices during any economic downturn fair better than those that don’t because they have a clear understanding of what their buyers value and they make a powerful statement of confidence about that value.

    Conversely, strong economies where people have a significant amount of discretionary spending, lures businesses into markets in which they are ill-equipped to compete. That’s one of the reasons we see this endless cycle of hiring, downsizing, hiring, downsizing. It’s also what makes companies more vulnerable to economic downturns.

    With regard to the Fed’s ability to reign in inflation. They have the ability to raise interest rates and a lot of room to do so before they would see a slowing. Inflation isn’t a concern now because demand is growing at a ‘normal’ pace. My fear, albeit a minor one, is that quantitative easing could accelerate spending. The reason I say that it’s a minor concern is that many people today are still a little cautious about spending. The shock of the economic downturn hasn’t fully gone away so buyers are easing their spending, but not spending with reckless abandon.

    I also think that this economic downturn has caused many people to consider what’s really important in life. I sense that they’re realizing that a simpler life can be every bit as enjoyable as one in which they’re constantly feeding materialistic needs. If that’s true, the recovery will continue at a moderate pace and the need for the Fed to take drastic action shouldn’t be a concern.

    All the best, Tom.

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