US: The Coming Battle between Profits and Prices - "Pricing power is rising, but so are costs, and that will soon squeeze margins"

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US: The Coming Battle between Profits and Prices

“Pricing power is rising, but so are costs, and that will soon squeeze margins”

The article states the fact that due to the latest sings of a stronger economy is leading to inflation threat worries.  Lately companies are dealing with a generalized rise in pricing power but, at the same time, they are facing an increase in cost of the inputs due to inflation.  For example the prices for unfinished intermediate goods (INPUTS) have gone up by 7.8% from a year ago.  But the prices of finished goods (OUTPUTS) have gone up by only 1.8%.  On the other hand, but also affecting the input prices is the labor rises.  Companies are facing higher bills for labor since the job market in U.S. is growing and is expected to increase during the following year.  The consequence of the last mentioned situation is that there are tighter labor markets and higher payroll costs at a time where the productivity is slowing down.  Therefore, in this kind of environment the companies have experienced shrinkage in their profit margins.  The profit margins of the companies are now not sufficiently high to absorb the increasing and higher costs that they are facing due to external factors, such as labor markets and inflation.

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According to the different concepts of production, cost and profit maximization studied in class there are several concept that are tightly related to this article.

When we talk about costs, we cannot help but to think about the effect of an increase in cost in the long run period.  As seen in chapter 8, the long run average cost curve will experience a shift to the right when there is an increase in cost due to an increase in the price of the inputs.  In this case this concept is applicable, since the increase in cost is due to ...

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