Cost-push inflation

[jj]

All this talk about cpi and inflation generally led me to thinking back to the 70's when I remember hearing inflation talked about in terms of "cost-plus" inflation, where companies increase prices to maintain or protect profit margins after experiencing costs in raw materials.  As so much manufacturing is affected by cost of oil either for raw materials (plastics etc.) or transportation, would anyone think that the increases in oil prices will have any effect?  Or will the market force companies to reduce their profit margins? 

Sorry this has come out sounding very "academic".  Interesting, I think though .... 

 

[brewer12345]

Frankly, I would have expected more of the oil and commodities price increases to have shown up in the CPI by now. Time will tell. When the Fed and economists really get worried is when consumers start to incorporate inflation in their expectations about the future. It is one thing to raise rates. It much harder to change people's expectations about the future. That's why the Fed has continued to boost rates, and I think they will keep going longer than the market seems to have baked in.

 

[Texas Proud]

Except for a few industries, the cost of energy is not as big of factor as other costs such as salaries, benefits, RE etc...

and for some raw materials... so if you are an airline, it hurts a lot, but if you are a bank, a retailer etc. it hurts a lot less..

You can not "push" price increases like before.. people will move to the other providers if your price is not in line with others...

 

[youbet]

Cost push inflation.  Demand pull inflation.  Gosh, it's like I'm a TA at Middle Tennessee State doing my MA in Econ again!

Let's see.......

If the market is purely competitive, supply and demand will determine price.  Price minus cost will determine profits.  Competitors who cannot keep cost low enough to generate profits will leave the market.  Excess profits will attract new competitors.  Equilibrium will be established for some moment of time.  (Hmmmmmm......haven't led that discussion group for a few decades, and it shows).

Anyway,  the answer to your question jj is that the markets won't force companies to reduce profit margins, but competition will, if there is no collusion.

 

[REWahoo]

As so much manufacturing is affected by cost of oil either for raw materials (plastics etc.) or transportation, would anyone think that the increases in oil prices will have any effect? Or will the market force companies to reduce their profit margins?

A growing trend in keeping up the appearance of holding down prices while actualyy implementing a price increase is to keep the price of the product unchanged but tack on something such as a delivery surcharge. This is already happening as UPS, FexEx and DHL, where they already have fuel surcharges to major customers and they will definitely go higher. These costs have been absorbed to some degree by manufacturers and retailers, but my bet is those days are over and the end consumer will soon be paying the freight (no pun intended ).

The same will hold true of the airlines. Watch for new and larger fuel surcharges....but the ticket prices won't actually go up. Right :

 

[laurence]

Frankly, I would have expected more of the oil and commodities price increases to have shown up in the CPI by now.  Time will tell.  When the Fed and economists really get worried is when consumers start to incorporate inflation in their expectations about the future.  It is one thing to raise rates.  It much harder to change people's expectations about the future.  That's why the Fed has continued to boost rates, and I think they will keep going longer than the market seems to have baked in.

This morning, the CPI numbers came out, and even the core rate (you know, without energy, food, housing, air, water, or any of those other useless things included) was .3%, higher than expected. Already this year we are running a full % point above last year, so I think it is starting to trickle in.

 

[brewer12345]

This morning, the CPI numbers came out, and even the core rate (you know, without energy, food, housing, air, water, or any of those other useless things included) was .3%, higher than expected.  Already this year we are running a full % point above last year, so I think it is starting to trickle in.

Time will tell. The core was only .1% above forecast, so its not like it couldn't easily be revised either way in the future.

 

[Nords]

Except for a few industries, the cost of energy is not as big of factor as other costs such as salaries, benefits, RE etc...
and for some raw materials... so if you are an airline, it hurts a lot, but if you are a bank, a retailer etc. it hurts a lot less..

I think industries that are more sensitive to price increases have learned to hedge their exposure with long-term contracts. (Or else they didn't "learn" anything, they're just the only ones not in bankruptcy.) $70 oil may not affect some of them until next year or even later...

 

[d]

in addition to increased competitivness, increased productivity has been rather impressive; this has allowed cost increases to be absorbed which would otherwise have impacted prices

 

[BigMoneyJim]

I think industries that are more sensitive to price increases have learned to hedge their exposure with long-term contracts. (Or else they didn't "learn" anything, they're just the only ones not in bankruptcy.) $70 oil may not affect some of them until next year or even later...

Correct. The first big runup caught a few companies by surprise. But the big fuel consumer companies have major long-term deals worked out now, and last year's spike didn't cause revenue/pricing problems as it did the previous runup.

I'm being vague, but being more specific reveals more info that I want to reveal now. On the other hand, I think I've mentioned I work at an airport.

 

[Gone4Good]

All this talk about cpi and inflation generally led me to thinking back to the 70's when I remember hearing inflation talked about in terms of "cost-plus" inflation, where companies increase prices to maintain or protect profit margins after experiencing costs in raw materials. 

"Inflation is everywhere a monetary phenomenon." Milton Friedman

Costs don't "push" prices higher. Prices are higher because there are more units of currency for a particular good today versus yesterday. Money is like any other commodity. If you increase the supply, its value goes down. The way we see the value of money decline is not directly (a dollar is always worth a dollar) but through the reflection of prices (i.e. the dollar has declined in price relative to goods and services . . . rendering goods and services more expensive).