This technique is what rental property owners view as the best way to increase the value of their assets. They use what's often referred to as the nuisance rental increase. Small increases in rental prices become a nuisance to renters but no more. As a result, occupancy remains the same while revenue increases substantially at the margin.
For businesses elsewhere, it is not as simple. Often, customers can walk away without having to bring in a U-haul. Price elasticity is much more difficult to anticipate. As a result, price increases risk damaging client relationships or even loss of share. Because sales teams are strong detractors of any corporate plan to increase selling prices, it is safe to assume that all companies struggle pushing inflation to their customers.
This is something that the Federal Reserve understands well. They take advantage of the fact that the market displays plenty of friction when trying to pass inflation from input to output. What this means is that businesses everywhere are the first to suffer when the economy experiences inflationary pressures. Because profits decrease one dollar for every dollar of cost increases, the associated damage to businesses is high. Yet, businesses still find it difficult to efficiently transfer inflation to their customers .
The fact that raising prices is difficult makes it noteworthy when empirical evidence uncovers a wave of increases. Usually, businesses will hold until they can no longer sustain the pressure. Then, suddenly prices increase by quite a bit. This would be analogous to a dike break.
I have observed costs at Costco increasing by a large percentage: in some cases over 10%. Costco is a great indicator of what the consumers will experience because they follow a strict policy of always marking all products exactly 10% above their cost. This means that any increases reflect actual cost changes at their vendors and not within Costco. So, price increases throughout the store result from price increases throughout their supplier network. As almost all important American consumer companies sell through Costco, their increases are quite responsive to market movements. Unlike Costco, most other companies retailing goods to consumers raise prices after a central decision at corporate, which masks market gyrations.
Another sign of accelerating inflation comes from the transportation sector. Transportation affects the cost of all products. If you ever wonder how is it that there is a large difference between the cost of a coffee bean at the farmer and at the store, you probably get an idea of the costs of transportation contained within the products that you buy. Yes, Starbucks makes a good profit for themselves. Yet, transportation costs are a substantial part of the price of the final product.
I am aware that UPS, FedEx and pretty much all transportation companies charge an additional amount to cover fluctuations in fuel costs. Fuel surcharges were the response to fuel inflation and are directly driven by market changes. But these are not the cost increases I am referring to. Instead, I am addressing the actual transportation rates charged. While many companies pay a discounted version of the official rate, a 6% increase in this rate will still equate to a 6% increase in the discounted rate. So it is easy to see how much inflation customers are experiencing from simply looking at the notices from these shippers to their customers.
If only things like fuel went up, the important stuff, the Fed would simply hide it under the rug. They do it every month in the Core Inflation data they report. But when inflation finally becomes a businesses output across the broad market, no magic trick can hide it. I am seeing evidence of this exact thing happening.
Am I being overzealous? Absolutely, I could be. Perhaps there is no need to start panicking yet. Just note that all discoveries are born from plain observation and that the increases I noticed were not trivial in magnitude; they certainly exceed the 3% long term inflation number.
These increases go past the nuisance level and should be considered. Paul Volcker, former Treasury Secretary, has highlighted that it is important to be aware of any changes in the inflationary environment because of the risks associated with high stimulus by central banks and the potential sudden break higher. The last thing that we need now is for businesses to face another round of profit erosion. Let's keep an eye on inflationary changes.