Inflation is kind of like consuming chocolate cake, you definitely want enough, and definitely do not want too much.  High inflation is crippling to consumers who cannot afford more expensive staples like food and toilet paper. Low inflation causes a myriad of problems, including constraining the ability of companies to pass on price increases. Low margins impact the ability of employers to hire people and pay higher wages. The Fed tends to increase interest rates in lockstep with inflation, in an effort to stimulate or contract the economy.

At two percent, inflation is considered to be an equilibrium in a healthy economy. Throughout most of the Q1, CPI hovered around 1.4% demonstrating the US economy’s tepid strength. The problem with averages is that they rarely tell the entire story.

Some sectors of the economy have demonstrated strength over the last year. Industries such as concert and sports tickets (+5%), and haircuts and personal services (+3%), are examples of the confidence of consumers and willingness to spend their discretionary income. Then there are regrettable increases in prices driven by supply shortages (such as tomatoes 8%) and escalating health care costs (5%). I hate tomatoes and the inability for the public or private sector to arrest rising health care costs, even more.

Fuel (-29%) and gasoline (-7%) have dragged down inflation. Some commodities have dropped such as ham (-10%). If one were really logical, they would replace their tomatoes with ham…I think.

But the most telling story in any analysis of pricing is the erosion of categories as a result of market forces. Consumer products such as toys (-7%) and consumer electronics and telephones (-16%) are reflective of the race to the bottom in a hyper-competitive global market. Clearly, the world and the pricing that go along with it are truly flat.

Pricing reflects our state of mind. When we are confident, we spend more and charge higher prices for our goods and services.  I actually think that in many companies, pricing is quite arbitrary, not a function of supply and demand or costs.  It is more a function of our own narrative on what customers will pay.

In a world where customers are splitting nickels and profits are thin, basing prices on true market forces is critical. Companies should gain insight on what the market will bear, and make pricing decisions based on the market, and not gut instincts. It is the momentum in an industry that dictates pricing more than the cost from suppliers.

That is why monitoring price indices are useful. By monitoring and calibrating market trends, we can make more informed choices with context. So be aware of market conditions, and hold the tomatoes, please.


Reference: Good News Inflation Shifts into Higher Gear-Torres & Stilwel Bloomberg Business Week

Bureau of Labor Statistics