Thursday, May 07, 2009

Business Cost Pressures Increasing

Though certain central banks acting today appears to have missed this, evidence is mounting that the temporary period of price deflation we saw late last year was indeed just temporary, as the prices of all forms of business inputs are increasing.

First of all, commodity price indexes have increased some 10-20% (depending on which index you look at) since their lows late last year, with key commodities like oil and copper leading the way with increases of more than 50%.

Secondly, unit labor costs (wages, salaries and other benefits adjusted for productivity) increases fast, up at an annual rate of 4.5% in the latest 6 months.

Now, businesses may perhaps choose to lower their margins further rather than raise consumer prices. But considering how margins have already been squeezed big time, there is little room for that. With margins already low, the probability increases that businesses will decide it is more profitable to raise prices than to reduce margins further.


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