US consumers could ‘feel the pinch’

The earnings season three months ago raised one key question for corporate America: Did companies have the pricing power to respond to rising freight and commodity costs by raising their own prices? This quarter’s earnings season is providing an answer: Yes.
So companies are going to raise prices. That aims to protect their profit margins. At whose expense?
The whole idea of “pricing power” is based on a perhaps faulty notion that companies raise prices only when they have the leverage to do so. The epitome of a company with this kind of pricing power is Apple; the average selling price of iPhones grew 20 percent over the past year.
But sometimes companies raise prices for other reasons, even if it means sales volumes are going to fall. And that’s been the story of this quarter’s earnings season. Consumer staples companies like Procter & Gamble, maker of diapers and toilet paper, had a rough start to the year as costs surged but pricing to consumers did not. Profits and margins fell, taking stock prices with them.
But with another three months to evaluate the environment, and with costs not falling, companies have announced their plans to pass on higher prices, even if it means a loss of sales and market share.
A few extra nickels and dimes in the grocery store may be one thing, but the more significant economic factor may be pricing of durable goods and building materials going up in response to higher commodity prices and the escalating trade war. Companies ranging from Mohawk Industries to Masco Corporation have announced their intent to increase their prices to offset their higher costs.
We’re moving into the third act of this play. In the first act companies were caught off guard on costs and pricing, and their stocks fell. In the second, as they got a handle on the cost environment, they’ve announced their intentions to pass on higher costs to consumers, Wall Street has gotten confident in that story, and stocks are in the process of recovering. But the third act is perhaps the most worrisome. What happens when all of these pricing increases hit the economy?
It’s a bit like a situation where one person taking advantage of a market opportunity is brilliant, but if 10 people all do the same thing then the market is saturated and everybody loses. If the cost of a few consumer goods, or gasoline, or some building materials, or automobiles goes up, then consumers and the economy can absorb it.
But if everything goes up in price, and all in a short period of time, then we have a problem. And that’s what could happen in the economy over the next
few quarters.
And it’s not even just the companies directly impacted by higher costs that need to be concerned. The technology sector may remain the market’s darling, but consumers don’t care which companies are impacted by tariffs and freight and which ones aren’t. They have a fixed budget, and if toilet paper, gasoline, automobiles and home repairs all go up in price, that means less money left over for Amazon orders, streaming media services and smartphone replacements.
Up until now, figuring out who’s being impacted by the higher cost environment has been a relatively straightforward endeavor, but soon the answer might well just be “everyone.”

— Bloomberg

Conor Sen is a Bloomberg Opinion columnist. He is a portfolio manager for New River Investments in Atlanta and has been a contributor to the Atlantic and Business Insider.