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