It’s Back… Inflation Threatens Economic Growth
By George Anderson
The most obvious and immediate sign that goods and services were getting more expensive came at the gas pump. But now consumers are finding a whole host of items carrying a higher price tag and most signs point to even more increases in the months ahead.
“Inflation is starting to gather momentum, and I don’t see any reason to believe it’s going to reverse this upward trend,” said Richard Yamarone, chief economist at Argus Research Corp
Last month, according to the Labor Department, consumer prices rose 0.6 percent. To date, 2006 has been the worst year for increasing consumer prices since 1990. Projected at the current rate, inflation for the year would be up 5.1 percent in the U.S.
The continuing rise in prices, say some economists, increases the likelihood that the Federal Reserve will need to continue raising the cost of borrowing money to keep inflation in check.
Lincoln Anderson, chief investment officer at LPL Financial Services, told USA Today, “The fear is there is a big inflation surge ahead of us, and the Fed has a lot more tightening ahead of us. The question isn’t will they have to raise rates another quarter point or half point, but whether they will have to go a full percentage point or two percentage points.”
The U.S. is not the only country dealing with rising prices. The European Union reported that member nations saw consumer prices rise 0.7 percent in April. Speculation overseas is that the European Central Bank will need to raise interest rates when it meets in June.
Moderator’s Comment: How will continued increases in consumer prices and the rate charged by banks to borrow money affect retailing businesses?
– George Anderson – Moderator
Inflation helps most retailers. Their inventories get more valuable and their margin dollars and sales dollars rise. Their costs rise too, but everyone’s costs are rising so retailers are not especially disadvantaged. When interest rates rise, people with bonds and saving accounts have greater incomes, which helps retailers. The big problem: if housing starts decline due to higher interest rates, purchases of furniture, appliances, home improvements will decline. But housing will remain reasonably strong as long as housing price increases outpace mortgage payment increases. Heavily indebted retailers will suffer from higher interest rates on their debt, but the real show-stopper usually occurs when credit is unavailable, not when it’s simply more expensive. If credit becomes unavailable, the retailers with the least debt will be stronger after the weakest go under, since competition will be decreased.
An excellent start to this discussion, Mark. I just want to caution all of us to not make too hasty or simplified conclusions. As I have said before, it is my opinion that this issue is extremely complex: it is composed of many interlocking factors that are in themselves composed of many interlocking factors. Some of the complexities involve the national debt, trade balances, consumer debt, the housing market, among many others. Be aware, too, that a national study of economic experts (at the level of Greenspan) showed that their predictions were no more accurate than random. Of course, it is fun to just “let fly” with one’s opinion. That’s fine too.
Inflation is not the answer for the retail food industry. It’s only artificial and not a good measure of the true health of the industry.
As to increased interest rates, a lot of growth is already in the pipeline and good companies can usually find money at favorable rates. However, if cheaper money is harder to get or unavailable to smaller retailers, then expansion plans will hit the skids.
Inflation is bad for retail. Consumers fill-up their cars first, then pay for necessities (rent and utilities) before purchasing goods at retail. This impacts everything from food (what they purchase; including alternative food choices) to their hard goods, to consumer electronics. The good news is that this correction has been a long time coming. The bad news is that because of the lag in purchasing power vs. consumer incomes, this correction will be here for awhile. Every retailer will feel this hit, but we will start to see it as publicly traded companies report their 2Q revenues, and really see it during the 3Q revenues. Hopefully, it will have corrected some of this imbalance by Q4 and the holidays will not be impacted. Only time will tell…
As a manufacturer, we have tried to pass material cost increases to our retail customers, and we have lost business because our customers decided to look for low cost import sources for our product. It is true that because of increased import sourcing, major retailers have kept inflation in check for the consumer by “exporting inflation.” If inflation and material costs continue to go up, we will see a more aggressive move to imports by major retailers. Whether we import it or our customer imports it directly, we lose people at our company either way. Without a job, people will make decisive retail purchasing decisions, and most likely will buy less. This feeds the circle of decline.
I hate to oversimplify, but the real threat of inflation is less disposable income for consumers, because income growth typically lags price growth. If things cost more (e.g., energy and mortgages), consumers will have less to spend at retail stores. This probably will have little impact on the higher end of the market, but could impact the low end significantly. I would also see consumers trading down from traditional department stores to discounters, and from discounters to dollar stores, etc.
There have already been several reports about the cost to Americans of essentials such as housing, gas, utilities and medical care taking up the bulk of their income. If costs continue to be high, most retailers other than those selling essential groceries are likely to take the hit sooner rather than later. In the UK, the number of bankruptcies already this year is much higher than it was last year. Presumably bankrupt people, or those near to it, will also be spending less on non-essentials. In spite of my general obtuseness where economics is concerned, I fail to see how increasing prices can be anything other than bad news for retailers. If customers can’t afford to spend now and prices keep getting higher, how can retailers not lose out?