In Poor Pricing Power, a Threat of Deflation

By April 21, 2010Economy

BusinessWeek examines an issue that was in the news a lot about a year ago, but seems to have slipped away — deflation. Government borrowing, spending, the reviving economy would all suggest inflation, right?

Maybe not. From “Poor Pricing Power Poses Problems for the U.S.“:

Some economists and analysts see reasons to worry about the opposite scenario—a period of deflation if companies feel compelled to lower prices to jump-start demand in a sluggish economic recovery burdened by high unemployment. Consumers initially embrace falling prices, but if it becomes deep and pervasive enough, deflation will eventually push employers to cut wages and ax jobs, driving worried consumers into complete retreat. Perhaps most dangerous, deflation hikes the cost of repaying debt by boosting the value of the dollar.

David Bogoslaw, the reporter, talked to the NAM’s economist.

David Huether, chief economist for the National Association of Manufacturers, cites diminished pricing power in sectors related to housing—nonmetallic minerals such as cement, bricks, and glass, as well as furniture makers. But food and chemical manufacturers, which together make up more than 27% of the manufacturing sector, have been able to raise prices over the past year.

Food prices are up 2%, and that’s only partly due to the pass-through of higher energy costs that have boosted transportation expenses for manufacturers, he says. Energy cost increases are also contributing to the 4% year-over-year rise in margins for merchant wholesalers, the middlemen between food producers and retailers.

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