Price: An Economic Indicator?

Can pricing help us gauge economic recovery?

I believe that pricing is one of the strongest indicators of economic recovery. Why? Because it indicates sellers’ confidence in the marketplace. Here are some recent reports to demonstrate that we’re going to see the recovery accelerate dramatically over the next three to six months:

• The Washington Post – Kraft Foods increases prices as are General Mills, Sara Lee and Kellogg.
• BBC – UK food prices soaring
• Reuters – Starbucks raises targets as traffic, prices rise
• Reuters – MillerCoors Q3 income ahead as beer prices rise
• Bloomberg Businessweek – British Airways Posts Profits as Ticket Prices Surge

What I find fascinating in these articles is that many of these companies are in industries in which discounting is used regularly as part of their pricing strategy. Food companies, in particular, are notorious for offering coupons and deals to drive sales, yet now they’re raising their prices.

Even more spectacular is seeing an airline raising prices. What gave British Airways the confidence to raise their prices? According to the Bloomberg Businessweek article, increased demand from business flyers. Similarly, Starbucks increase is driven by increased demand.

Conversely, MillerCoors raised prices despite soft demand according to Reuters. Hmmm, can’t help but wonder how much they could have earned for shareholders if they’d employed this strategy earlier?

My point is that these companies wouldn’t be raising prices unless they were confident that the market is strong enough to weather these increases. Contrast this newly-found confidence with the fact that, at the first sign of the economic downturn, almost every company lowered prices. The scarcity mentality was a raging wildfire destroying prices and margins to the point that many companies couldn’t survive. Arguably some of them shouldn’t have been in existence anyway.

It’s counter-intuitive, but rising prices is an early indicator that companies and consumers alike have adjusted, psychologically, to the economic realities they face and are able to move forward again. Yes, even in the face of unemployment numbers that have remained static. People adapt. They find ways to adjust their lives to deal with the realities of the marketplace. Confidence is regained as part of this adaptation. This confidence is what allows companies to feel comfortable raising prices. The combination of renewed confidence and higher prices will spur hiring which will further accelerate demand for these companies products/services. The economy is recovering.

As many of you will already have surmised, these price increases can also be an early indicator of the inflation we’re about to face. Indeed, there is some debate, even within the Federal Reserve Board of Governors, as to whether or not the recent decisions to pump more money into the system vis-a-vis purchases of Treasury debt is going to encourage economic growth or accelerate inflation.

I’m not an economist, but I can’t help but believe that adding money to a system in which price increases are evident, particularly increases in staples like food, is going to do more harm than good. Fortunately the Fed has a lot of room, given the extremely low interest rates that exist today, to rein in inflation.

Author – Dale Furtwengler