The Homa Files

TakeAway: Companies that sell consumer mainstays are rolling out price increases in a collective test of America’s economic strength and in response to higher raw-material costs.

If consumers are willing to pay more, it could indicate the economy is turning a corner, but also serve as a warning that inflation could spiral.

If consumers balk at higher prices, though, it would represent a setback and could pinch corporate profits. Some companies could be forced to backtrack with discounts if sales falter.

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Excerpted from Wall Street Journal, “Gingerly, Retailers Try to Pass Along Higher Costs” By Liam Pleven,October 2, 2010

The ability of companies to sustain such price increases may sway how the Federal Reserve views the health of the economy, and potentially figure in its decision on whether another big round of stimulus is needed. The country’s low rate of inflation was cited by the Fed last month as a main reason the central bank is considering further steps to juice the economy.

Companies say some labor costs are rising, particularly for overseas manufacturing, and point to rising commodities prices. Commodities typically make up less of a company’s costs, but prices have risen sharply, with cotton up 38% this year, coffee up 33% and rubber up 17%.

Some firms successfully increased prices earlier in the year, with little or no discernible impact on inflation. The 6% increase that Goodyear began rolling out for consumer tires follows on another 6% rise in June. The firm cited higher raw-material costs.

But many other firms held off on charging more even though the recession technically ended more than a year ago, because they were concerned about a consumer backlash and losing sales to rivals.

Still, some companies are dipping their toes in the water daintily, targeting specific products.

Starbucks, for instance,  is raising prices on “labor-intensive and larger-sized beverages,” but maintaining or lowering the price of a regular cup of coffee in most markets.

Edit by AMW

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Full Article:
http://online.wsj.com/article/SB10001424052748704029304575526331692863238.html?mod=WSJ_hpp_sections_business

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This entry was posted on October 18, 2010 at 6:02 am and is filed under Mktg - Pricing. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.