Thursday, March 17, 2011

Haves and Have-Nots; Surging Costs

Wall Street Journal readers are often more interested in the horserace between stock prices than overall macroeconomics; it takes a little while for this piece to get to its primary economic point.  Within a demand driven (versus money supply driven) inflationary period, not all products go up in pricing.  Demand driven inflation is "driven" by population increases, or false in output (drought-famine)
Historically (as in the 16th and 17th centuries), during demand driven inflation, manufactured goods stayed at relatively flat prices, while food and the land went up in price.  Today that combination is likely to be food, and energy, as land is not as severe of a limiting factor.  As one of the major inputs in agriculture, water pricing, if not heavily regulated, would also expect to go up in price.  Since water is heavily regulated, the more likely result would be water shortages.  It is important to note that this inflation incurred at a time when there was not fiat (paper) currency worth noting.  It is not a printing press issue.
To our specific data point, clothes as a manufactured good have a limited ability to increase their pricing relative to the more basic commodities.  As people’s budgets get tighter, they will buy relatively more food and fuel, and fewer clothes.  Where clothes are status, those who have money will only be too happy to pay extra to separate themselves from the proletariat.
Surging costs on everything from cotton to fuel and overseas labor are creating headaches up and down the retail supply chain and leaving many companies with little choice but to start raising prices...
The hit could be worse for some retailers than others, as a number of earnings reports this week from specialty stores ...that have pricing power: strong brands and financially sound customers willing and able to pay up. Teen retailers like ... aren't so lucky...
That only underscores how the retail landscape is splitting between those who can raise prices without killing off demand and those who can't, or even are forced to cut prices further to keep customers. And it stems from the broader bifurcation of the U.S. economy into the haves and have-nots.
Despite the labor market's recent improvement, wages and salaries accounted for a record low 50.6% of U.S. personal income in January. Fifty years ago, notes Yardeni Research, that share was up around 66%. With more Americans drawing jobless benefits and food stamps, the proportion of government transfer payments has been steadily on the rise.  Kelly Evens, Apparel Retailers’ Pricing Power Gets Tested, Wall Street Journal, Page C1, March 8, 2011.

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