Retail Prices Going Up

Stronger retail spending this summer appears to have given retailers greater confidence in recent months to boost prices, or at least slow price declines. Before September’s pause, retailers enjoyed three straight months of 1.2% monthly gains in retail and food service sales, excluding autos.

Economy.com expects that overall retail and food service prices will only start to broadly accelerate late next year. A weaker dollar will certainly play a role, particularly if the greenback’s recent depreciation continues. One reason that the soft dollar has not affected prices of consumer goods yet is that many Asian countries are still closely managing their exchange rates to provide favorable terms of trade. Consequently, prices for imported goods from Asia, a key supplier for domestic retailers, have been flat in recent months. If pressure by the G7 and President Bush to loosen currency controls is successful, import prices for retail goods could lift dramatically. This will not make Wal-Mart happy given the fact the company accounts for nearly 12% of all U.S. imports from China alone.

Firming consumer demand will also eventually support retail prices. At first, consumers will be reluctant to pay higher prices after having become accustomed to discounts. In fact, sales are expected to slow in the final months of this year due to a lack of pent-up demand, high consumer debt burdens and concerns about weak job growth. However, a stronger economy will ultimately override those impediments.

Particularly when the job market improves, shoppers will start opening their wallets a little wider again, giving retailers greater leeway to boost prices. It won’t happen overnight, or even noticeably over the next year, but eventually, those loud discounting advertisements will fade away.

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