Costs vs. Pricing Power: Part I

By Andrew Paparozzi
In May 16, 2008

The relatively tame Consumer Price Index (CPI) for April may have been good news for consumers, but is there a negative side to this story? The recent release by the BLS showing that the CPI rose a lower-than-expected 0.2% in April and only 0.1% after excluding food and energy (commonly referred to as core CPI). With everyone reeling from sticker shock at gas stations and supermarkets, it is understandable that these results once again opened up a can of worms over how the CPI data are complied and measured. But that’s a debate for another day.

Taken at face value, CPI results overall have been relatively positive over the past three months. During the February-April period, consumer prices rose at an annual rate of 2.3%, with the core CPI up 1.2 % —not exactly an inflationary spiral. Although it doesn’t provide much relief when filling your tank or grocery bags, this is welcome news for consumers. But, being a loyal member of the two-handed economists club, I must point out that the side of the story for producers is more sobering: A tamer CPI suggests that the weak economy is putting further restraint on pricing power during a period when business costs are still experiencing upward pressure.

Labor costs as reflected in the Employment Cost Index (ECI) from the BLS rose at a 3.3% rate year-over-year in the first quarter 2008. For all of 2007, the ECI for all workers showed an increase of 3.4%. However, the data suggest that progress witnessed over the past few years on restraining the rise in benefits cost may have run its course. We know that costs of energy and materials are not about to provide much relief anytime soon. Add in rising local taxes because of declining government revenue and the combination is not too pleasant. Cutting costs while maintaining quality and performance is always something of a high-wire balancing act, but it is one that more and more companies will have to perform.

Joseph Vincenzino

Andrew Paparozzi

Epicomm's Andrew Paparozzi, Vice President/Chief Economist, is well-known for his accurate and thoughtful discussions on the economy and US commercial printing industry. A foremost author and speaker on economic business trends in the printing industry, Paparozzi heads Epicomm's Printing Economic Research Center.

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