The Labor Department reports that the Producer Price Index (PPI) – the costs incurred by companies that make things – went up 10% in February. Making matters worse, the government revised January’s PPI up to 10% as well.
Economist Joel Naroff, of Naroff Economics, says that’s not good news for consumers. Eventually, those cost increases are going to get passed along to consumers, perhaps in areas where it will hurt the most.
“The surging food and energy prices are likely to move through the economy, but that takes time, so the expectation is that producer costs will continue to rise strongly over the next few months, though maybe not as massively as they have been,” Naroff told ConsumerAffairs.
There are two choices for businesses getting hit with these higher costs: Pass them along to consumers or absorb most of them and reduce their profit margins. Publicly traded companies may be less likely to do the latter.
Food and energy costs accounted for the biggest cost increase for producers last month. If those two categories are removed, the increase in inflation and the wholesale level drops to 6.6% – which is still the highest level in decades.
A pass to raise prices
The question for consumers is will these price increases persist, or will they be "transitory," as the Federal Reserve said in 2020? If they continue for at least a while, Naroff thinks it could flash a green light for businesses to raise prices permanently.
“For the last 10 to15 years, firms had limited pricing power,” he said. “I used to say that, outside of food and energy, the path from rising producer costs to increased consumer prices was random and often wound up at a dead end. Thus, price increases were frequently temporary or limited.”
Unfortunately, things seem to have changed now. Narroff says the result could be rising prices at the retail level.
“Now firms have pricing power and one way they have of retaining that power is to limit the reduction in prices as input costs decline - if and when they do,” Naroff said. “That is likely to be the case for as long as firms can keep that going.”
The Federal Reserve wraps up its March meeting today and is widely expected to increase a key interest rate as a way to keep inflation in check. While it might help, it would also increase the interest rate consumers pay on auto loans and credit card debt.