Who bears cost?
The US has every reason to fear disinflation which could spiral into deflation. As the last post shows, core CPI, CPI excluding volatile goods like food and energy, has increased only 0.61% in October over the year, the smallest on record.
Why is low inflation a problem? It appears to be a bonanza for consumers, because they can afford to buy low-priced goods and services, be it from Chinese or domestic markets. But things aren't so easy as is life itself.
One of the reasons why the inflation rate is so low in the US is that given a considerable gap between supply and demand, US companies have failed to pass through costs coming from soaring commodity prices onto consumers. In other words, companies have very weak pricing power over their products.
Businesses have to struggle in a quagmire of low margins, and as a consequence are unwilling to turn to labor markets, which could cap personal income, and hence reduce the purchase of even such low-priced goods. If so, cash-strapped companies would be compelled to cut more costs, and on and on... In the meantime, inflation could die down even into a negative territory, that is, deflation. This "vicious cycle" would continue until a wide gap between supply and demand goes away so that corporations regain control over prices, which would end up as a resumption of, more or less, price increase.
Low inflation environment brings a classical case of prisoner's dilemma for companies. Every company wants to reflect higher costs on selling price, but is afraid to lose when does it because there is no assurance that others follow suit. They might leave prices at the same low level to gain market share and push competitors out of business. Hence, there is a huge incentive to cut cartel agreements on price adjustment.
The comparison with other countries, especially the UK, clarifies how US corporations have lost pricing power in the midst of growing costs.
First, let's look at the CPI, the index of prices that consumers pay. October's CPI in three countries, the US, the UK, and Germany, increased 1.2%, 3.1%, and 1.3%, respectively, over the year. Among them, UK's inflation rate is quite notable compared with the other two.
On the other hand, the PPI, the index of prices that producers sell, rose 4.3%, 4.0%, and 4.3%, respectively, in October from the previous year. Output price increased almost the same across all three countries.
What do these numbers tell us? UK consumer prices grew higher relative to the others while factory prices rose similarly in all three. In other words, UK companies have succeeded in a cost pass-through while the other two have to internalize cost pressure.
Britons may look like paying more than Americans, but the reason is not that British prices are too high, but its domestic demand is just brisker than the counterparts. A storm of cost cut would overwhelm American and German corporations.
Why is low inflation a problem? It appears to be a bonanza for consumers, because they can afford to buy low-priced goods and services, be it from Chinese or domestic markets. But things aren't so easy as is life itself.
One of the reasons why the inflation rate is so low in the US is that given a considerable gap between supply and demand, US companies have failed to pass through costs coming from soaring commodity prices onto consumers. In other words, companies have very weak pricing power over their products.
Businesses have to struggle in a quagmire of low margins, and as a consequence are unwilling to turn to labor markets, which could cap personal income, and hence reduce the purchase of even such low-priced goods. If so, cash-strapped companies would be compelled to cut more costs, and on and on... In the meantime, inflation could die down even into a negative territory, that is, deflation. This "vicious cycle" would continue until a wide gap between supply and demand goes away so that corporations regain control over prices, which would end up as a resumption of, more or less, price increase.
Low inflation environment brings a classical case of prisoner's dilemma for companies. Every company wants to reflect higher costs on selling price, but is afraid to lose when does it because there is no assurance that others follow suit. They might leave prices at the same low level to gain market share and push competitors out of business. Hence, there is a huge incentive to cut cartel agreements on price adjustment.
The comparison with other countries, especially the UK, clarifies how US corporations have lost pricing power in the midst of growing costs.
First, let's look at the CPI, the index of prices that consumers pay. October's CPI in three countries, the US, the UK, and Germany, increased 1.2%, 3.1%, and 1.3%, respectively, over the year. Among them, UK's inflation rate is quite notable compared with the other two.
On the other hand, the PPI, the index of prices that producers sell, rose 4.3%, 4.0%, and 4.3%, respectively, in October from the previous year. Output price increased almost the same across all three countries.
What do these numbers tell us? UK consumer prices grew higher relative to the others while factory prices rose similarly in all three. In other words, UK companies have succeeded in a cost pass-through while the other two have to internalize cost pressure.
Britons may look like paying more than Americans, but the reason is not that British prices are too high, but its domestic demand is just brisker than the counterparts. A storm of cost cut would overwhelm American and German corporations.
posted by Akihiro Gotoda at
5:31 PM
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