As Costs Rise, U.S. Businesses Are Scrambling to Keep Lid on Prices
Inflation, the bane of the 1970s, is barely a ripple on the U.S. economy today.
Even Federal Reserve Chairman Alan Greenspan admits, “I cannot find it, no matter where I look.”
And Greenspan, whose job is keeping prices down, is looking harder than most.
Beneath the calm surface, though, a struggle is going on. Beset by competition and consumer resistance to higher prices, American businesses are fighting to find new ways to absorb or deflect upticks in their own costs without sacrificing profits or raising prices.
So far, the effort has been salutary for the economy. Not only is it paying off with low consumer price inflation in the short term, but it is driving the surge in technology investment, which business is counting on to keep delivering cost-saving innovations over the long term.
However, cost pressures are growing more intense with the rebounding global economy. Beyond oil, which has doubled in price to more than $30 a barrel in the last year, raw-materials prices are rising to meet demand from factories in Asia, Europe and Latin America.
Wage increases, long offset by rising productivity gains, may also be poised for a sharper upswing as the domestic labor market remains tight.
Unless these cost pressures can be contained, Greenspan and others say that inflation inevitably will reappear at the consumer level, and that by the time it’s visible it will be too late to be easily tamed.
Coping with rising costs takes all the creativity companies can muster. But these are skills that many U.S. manufacturers honed during the 1980s, when low-cost Japanese products drove them to the ropes.
If you supply materials or services to Eaton Corp. in Cleveland, for example, don’t even think about charging more without ironclad evidence.
“When a supplier can make a very direct case about oil-related costs, they’re likely to get favorable consideration,” said chief economist Jim Meil, acknowledging that the leap in oil prices is out of any supplier’s control.
But if the vendor is being hurt by higher labor costs, “We’d say, ‘Sorry about that, but that’s your problem to manage,’ ” Meil said.
A classic go-between, Eaton buys raw materials and parts such as bearings and delivers engine components, semiconductor equipment and electronic switches to manufacturers higher up the food chain. It can’t go easy on suppliers because it gets no breaks from its own customers.
“We are very, very tough on attempts to raise price,” echoed an executive at a Midwestern footwear maker. “We’ve flat-told our suppliers we can’t take any pass-on [of their costs],” he said, explaining that tough foreign competition prevents his firm from raising retail prices.
Similar results turn up in recent surveys by the National Assn. of Purchasing Management, whose members buy goods and services for American companies.
The NAPM’s indexes of prices paid by businesses have been rising steadily for months, with particularly sharp upturns in plastic resins, paper products, metals and transportation costs.
But when asked in a December survey whether they were able to recover such costs by raising their own prices, 81% said they could pass along only a portion or none at all.
What a difference from a generation ago, when the public was so inured to inflation that firms felt no need to scrounge around for more efficient processes or more labor productivity. Why bother, when you could just hand the bill to the consumer?
Another reason that rising raw-materials costs still aren’t finding their way into many consumer prices is spending patterns. Although the headline says the roaring U.S. economy is being fueled by consumer spending, consider what people are buying.
In the 1990s, consumer spending on goods other than computers actually fell as a percentage of gross domestic product, to 62% at the end of the decade from 64.5% at the start, said economist Mark Bitner at First Union Corp. Meanwhile, consumer and business spending on high-tech goods leaped to 7.2% of GDP from 2%.
And what’s happening to electronics prices? That’s right--falling for years.
Inflation’s failure to show up in such gauges as the producer price index and consumer price index makes it harder for Greenspan to justify his tight-money stance, as indicated by the skepticism he encountered last week in his twice-yearly appearance before Congress.
In the absence of much direct evidence of higher prices, Greenspan points to conditions in the economy that he believes will create inflation sooner or later.
Demand, expressed by consumer and business spending, is outstripping supply, or the U.S. economy’s ability to produce goods and services, Greenspan says. For now, the gap is being filled by imports and by U.S. firms’ uncanny success in eking more productivity out of the tight domestic work force.
But low import prices and stunning productivity gains can’t last forever, Greenspan contends. He argues that it is worth the pain of higher interest rates to ease inflationary pressures before they get too strong to control.
“Inflation does indeed look tame right now, but if aggregate demand continues to grow faster than supply, that’s what delivers pricing power,” said Mickey D. Levy, chief economist at Banc of America Securities.
Pricing power, a phrase not heard much in recent years, refers to the ability to make retail price increases stick.
Despite the mild overall inflation numbers, there have been a few places where pricing power seems to be returning.
Air fares, medical costs, residential rents, hotel and motel lodging and educational fees are a few service-sector areas where prices paid by consumers are up sharply from their long-term trends.
Then there’s beer.
Brewers lately have been hit by rising costs of advertising (which always gets more expensive in an Olympic and presidential election year), shipping and packaging, especially aluminum and glass.
But unlike a couple of years ago, when the Big Three of Anheuser-Busch, Miller and Coors were fighting price wars, they now are able to pass along some costs to beer drinkers.
Coors has put through price increases of about 1.5% in the last six months, said Dave Dunnewald, manager of investor relations. It may not sound like much, but it follows years of flat pricing and discounting in the 1990s, he said.
In other areas, consumers seem to have been just plain lucky not to get hit at the cash register.
Grocery prices have been stable because of a worldwide glut of food products, said Donald Ratajczak, director of the Economic Forecasting Center at Georgia State University in Atlanta.
“It’s the farmers who are suffering,” Ratajczak said. “The grocers are kicking up their [profit] margins, but they don’t have to scare consumers because they’re still getting cheap poultry, cheap eggs.”
Another big check on price hikes has been the growth of Internet commerce, specifically the willingness of online retailers to sell goods at cost or even below cost in order to build a powerful brand name.
But there is evidence that the stock market is getting impatient with these e-tailers and their ever-greater losses on ever-greater sales. Under pressure from investors, Amazon.com recently made the unusual announcement that the bookselling portion of its online business had turned profitable.
If the world harvest hits a slump and if Internet merchants begin marking up their goods, that part of the windfall for consumers may be over.
There may also be a limit to labor’s forbearance. For years, real wages have been barely creeping upward despite the low unemployment rate and big productivity gains.
The economics profession still hasn’t produced a satisfactory explanation of how productivity works and so cannot predict how long the gains will continue.
The figures aren’t final, but economist Ian Shepherdson of High Frequency Economics in Valhalla, N.Y., estimates that fourth-quarter 1999 corporate profits rose at an annual rate of 15%--the biggest spurt in earnings growth since 1995.
“This represents a clear indication that despite the tightness of the labor market, companies are retaining a much bigger proportion of the gains from the surge in productivity growth than employees,” Shepherdson said in a report this week.
Some think that workers, cowed by the massive layoffs and cutbacks of the early ‘90s, remain too insecure to press for real wage gains. But unionized engineers are now picketing Boeing for higher pay in a rare display of white-collar solidarity. Even at fiercely anti-union Wal-Mart, a handful of butchers at a Texas store just voted to become the first unionized employees in the company’s 850,000 U.S. work force.
Said Shepherdson, “Real wage increases close to zero are simply incompatible with an economy growing by more than 4% per year and an unemployment rate of 4%.”
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Where is Inflation?
Rising energy prices helped lift the consumer price index 2.7% last year, but the “core” rate of inflation--excluding energy and food costs--rose 1.9%, the slowest pace in decades.
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Times staff writer Thomas S. Mulligan can be reached at thomas.mulligan@latimes.com.
