Trump’s pump-prim­ing helps firms make prices higher again

The Star Malaysia - StarBiz - - Front Page -

WASH­ING­TON: Pres­i­dent Don­ald Trump is giv­ing many busi­nesses an un­ex­pected ben­e­fit on top of lower taxes and reg­u­la­tory re­lief: He’s help­ing to re­store their pric­ing power.

By pour­ing hun­dreds of bil­lions of dol­lars of tax cuts and ex­tra govern­ment spend­ing into an al­ready stretched econ­omy, Trump is fos­ter­ing an en­vi­ron­ment where firms such as con­glom­er­ate 3M Co can raise prices be­cause de­mand for their prod­ucts is strong.

“The power is with the seller,” said Chris Wil­liamson, chief busi­ness econ­o­mist at con­sul­tants IHS Markit Ltd.

That’s a turn­around from the past decade, when ex­ec­u­tives of­ten be­moaned their in­abil­ity to lift prices be­cause of their fear of sac­ri­fic­ing sales. The shift will help them pad prof­its that are al­ready surg­ing thanks to lower taxes.

It’s also good news for Fed­eral Re­serve chair­man Jerome Pow­ell and his col­leagues, who have strug­gled to lift in­fla­tion to their 2% tar­get and hold it there. Pol­i­cy­mak­ers took note of re­ports of a re­turn of pric­ing power at their July 31-Aug 1 meet­ing, ac­cord­ing to the min­utes of that gath­er­ing re­leased last week.

It might not be so wel­come to work­ers, who’ve had trou­ble win­ning big­ger wage gains in spite of un­em­ploy­ment near a multi-decade low. Faster price rises al­ready are erod­ing what pur­chas­ing power they have – a point that some Demo­cratic op­po­nents of Trump have made as Novem­ber con­gres­sional elec­tions ap­proach.

Av­er­age hourly earn­ings ad­justed for in­fla­tion fell 0.2% in July from a year ear­lier, notch­ing the weak­est read­ing since 2012.

The po­lit­i­cal de­bate high­lights the chickenor-egg ques­tion at the heart of the in­fla­tion process that’s been noted by Mor­gan Stan­ley chief US econ­o­mist Ellen Zent­ner and oth­ers: Which comes first – stepped-up price in­creases or big­ger pay hikes?

Some econ­o­mists ar­gue that ris­ing prices come first, as com­pa­nies seize op­por­tu­ni­ties to but­tress their bot­tom lines when de­mand is strong. Work­ers then seek higher wages to make up for the pur­chas­ing power they’ve lost to ris­ing in­fla­tion.

Oth­ers con­tend that wages lead the way as a tight job mar­ket prompts com­pa­nies to boost salaries for cov­eted work­ers. Firms fol­low that with price in­creases to cover growing wage bills, boost­ing in­fla­tion in the process.

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