Wednesday, April 20, 2011

Beige Book Part III; Prices

From the Federal Reserve:
Input prices rose in most Districts, particularly for cotton and other agricultural commodities, petroleum-based products, and industrial metals. In addition, shippers added fuel surcharges in several Districts. Boston, Cleveland and Atlanta cited increasing cost pressures, and some manufacturers in Boston were raising their selling price to pass costs along to customers. The ability to pass through increases, however, varied in both the Chicago and Atlanta Districts, with manufacturers generally being more successful than retail or construction firms. Contacts in the San Francisco District reported a limited ability to pass through higher input prices on anything other than food and gasoline. Kansas Cited stated that more manufacturers and retailers expected to raise prices in coming months.

Wage pressures were reported to be mostly contained, especially in the Philadelphia, Cleveland, Minneapolis, Dallas, and San Francisco Districts. Kansas City noted wages generally held steady, even with expanded hiring, and wage pressures were expected to be contained except for highly competitive or specialized positions. Wage pressures were described as modest in the Chicago District. However, Richmond reported slightly faster wage increases. Boston reported that nearly all of the manufacturing firms that they contacted planned to implement merit increases, and one contact planned a greater merit pool next year to compensate for previous low raises. Philadelphia noted some concern about rising nonwage employment costs, but wages for business firms in the District were mostly steady.

Philly: Reports from manufacturers since the previous Beige Book continue to indicate rising factor prices, especially for energy inputs. Far fewer manufacturers report raising output prices, while a few indicate resistance to hikes from their customers, if not expectations of discounts. Retailers generally indicated that selling prices have been steady, although some reported that they have raised apparel prices in response to higher wholesale costs. Auto dealers reported continuing high prices for used cars and recent increases in prices for new cars. Although the predominant view among Third District firms is that overall inflation will move higher, slightly fewer firms expressed that view compared to reports from the last Beige Book. Nevertheless, several firms in the region said they have implemented hedges or signed forward contracts for motor fuels.

Business firms in the region reported mostly steady wages since the last Beige Book, although some continued to express concern about rising nonwage employment costs. Employment agencies reported growth in demand for workers, although they indicated that firms were continuing to delay additions to permanent or temporary staff until the need for more workers becomes pressing.

Atlanta: Firms' expectations for unit cost increases over the next year continued to rise, with material costs and employee salaries and benefits cited as sources of potential cost pressures. Reports of price pass-through were mixed across the District and varied based on industry and the presence of competitive pressures. For example, many retailers noted that strong competition was limiting their ability to raise prices. Homebuilders said that they have been unable to pass through material cost increases because of persistent downward pressure on home prices. However, many manufacturers were more successful in increasing prices to their customers.

Chicago: Cost pressures rose in February and March. Wage pressures remained moderate, but raw materials prices increased. The most notable increases were for steel and other industrial metals, but the prices of plastics, paints, resins and cotton also rose. Fuel and transportation surcharges were also noted to be rising. Pass-through to downstream prices was moderate, however. Retailers indicated that they were trying to limit raising prices, though pass-through was noted to be increasing, particularly for food and energy-related items. In contrast, several manufacturing contacts reported an increase in pricing power, with less pushback from customers in accepting higher prices. Commercial builders have been able to pass along minimal price increases to offset some of their higher raw material costs, although residential builders have not been able to do so.

Minneapolis: Wage increases remained subdued. Manufacturing wages in District states were up slightly in February compared with a year earlier.

Retail price increases were modest, but price pressures for inputs continued. According to the Minneapolis Fed's ad hoc survey, 25 percent of respondents increased prices for their final goods and services during the past six weeks, while 53 percent noted increased input prices. Minnesota gasoline prices at the end of March were about the same as in mid-February, but were 75 cents per gallon higher than a year ago. While a number of metals prices remained well above year-ago levels, some prices decreased slightly since the last report. In Minnesota, a chamber of commerce representative noted that a surprising number of businesses took advantage of lower commodity prices last year to negotiate deals that provided at least short-run protection.

KC: Wages generally held steady even with expanded hiring, and more firms planned to increase selling prices, especially in industries where input prices have surged. Of the companies that added staff, most were not offering higher salaries to attract applicants. With the exception of highly competitive or specialized positions, wage pressures were expected to remain contained. Many District manufacturers reported another jump in raw materials prices, and some companies had already raised finished goods prices with more firms planning to do so in the coming months. Several construction suppliers and transportation companies reported fuel and delivery surcharges were common, and higher input costs were often being passed through to customer prices. Some restaurants increased menu prices in reaction to higher food costs, and some hotels raised room rates. District retailers also expected an uptick in selling prices with stronger consumer demand.

Dallas: Price pressures continued to build since the last report. Many responding firms said high fuel prices were causing their input costs to rise, and contacts in the lumber and transportation services industries increased selling prices in response. Some manufacturers noted steel prices had risen, and most construction respondents said metal and petroleum based products, such as rebar, copper and asphalt had increased in price. In the service sector, airline fares were up significantly due to increases in the price of jet fuel. Legal contacts noted slight increases in billing rates, and retailers continued to report upticks in food prices.

The price of crude oil rose from $85 per barrel in mid-February to over $100 per barrel in late March. Natural gas prices receded early in the reporting period as cold weather subsided, but strengthened again to over $4 per Mcf at the end of March, due to geopolitical uncertainties and rising crude oil prices. Prices for most petrochemical products increased since the last report, according to respondents.

Frisco: Price inflation for final goods and services was modest during the reporting period. Although prices remained elevated for an assortment of raw materials and commodities and rose further for some, such as oil, the pass-through to final prices was quite limited, with the noteworthy exceptions of food and gasoline. For most other retail goods and services, prices continued to be held down by subdued demand and vigorous competition.

Contacts in most sectors reported that upward wage pressures remained weak. High unemployment and limited hiring kept compensation gains at low levels in most regions and sectors, although significant upward wage pressures were noted for workers with advanced skills in technology fields. Looking ahead to the next six months, the reports indicated that wage gains are likely to pick up somewhat as more businesses eliminate wage freezes established during the downturn.

-- Manufacturing is bearing the brunt of the price increases. As such, it's important to remember the difference and relationship between crude, intermediate and final prices.


When I previously presented the above chart, I explained it thusly:

The above chart shows crude, intermediate and end producer prices for the last 30 years. Notice that we can group these prices into two groups: crude prices (which are far more volatile) and intermediate and finished PPI (which are far less volatile). Also note the intermediate stages of production appear to absorb the price increases of crude goods very well and by the time we get to finished goods the impact of crude price volatility is noticeably diminished.

Manufacturers are able to absorb a fair amount of the price increases occurring in production right now -- although I would also mention there is probably a time limit to that situation; at some point, we will start to see increased prices as a result of rising commodity prices.

-- Several districts reported the addition of fuel surcharges to transportation costs. This is to be expected.

-- Dallas mentioned the increase in fuel prices as a reason for rising transportation costs.

-- Several districts noted that businesses used the period of low commodity prices to negotiate favorable contracts.

-- Not all industries are able to pass on higher prices. The residential housing market's prices are still dropping, preventing the ability to pass through raw material price increases. Commercial real estate is in somewhat of the same boat.

-- Wage pressures are non-existent