“Rockets and feathers” is economists’ name for how prices change in some less-than-competitive markets. When companies’ input costs go up for some reason, the prices they charge their customers go up like a rocket. When their input costs go back down, their prices fall, but ever so slowly, like a feather. The example most of us can relate to is the retail price of gasoline.
At least in the feather scenario, retail prices do go down. What’s worse for consumers is when companies simply don’t cut their prices in response to lower costs, and enjoy higher profit margins as a result. There are signs of that beginning to happen now in the U.S. market, at least in some segments.
This week I interviewed Samuel Rines, an investment strategist at Corbu L.L.C. in Houston. Rines said he coined the term “price over volume” in June 2022 to describe how companies were fighting higher costs at the time. Revenue equals price times volume, of course. If a company could manage to raise its price by a big percentage and have its volume go down by only a small percentage, it would increase its revenue, offsetting its higher costs.
Some people called that profiteering or greedflation, but to Rines it was just good business. “If you’re profit-maximizing you’re going to do that and you should do that,” he told me.
Profit margins grew, as an article in The Times this year showed. Now, though, he said, they could grow even more. He’s coined another term: “price and margin.” Some key input costs have fallen, and customers aren’t agitating for lower prices because they’ve become inured to paying more. “The next year is going to be a completely different level. The interaction of price increases and input cost deflation is powerful,” he wrote in a follow-up email.
True, a business could try to grab market share by slashing prices, but few chief executives are willing to play that game. “Businesses will be much more resistant to lowering their prices based on two to three months of declining costs” because they think the decline might be temporary, Rines said. “They’re afraid they’re going to get whiplashed.”
In a note to clients on Tuesday, Rines pointed to Sherwin-Williams Inc., the Cleveland-based paint manufacturer, as the latest example. In its quarterly earnings report on Tuesday, Sherwin-Williams said that “income before income taxes increased primarily due to selling price increases in all segments and higher sales volume in the Paint Stores Group, as well as moderating raw material costs.”
Isabella Weber, an economist at the University of Massachusetts Amherst, told me she agreed with Rines. Up to now, she said, some companies managed to amplify their profits through price increases, but “the dominant tendency was protection, not amplification.” Now, she said, amplification could become the order of the day.
That will be easier for companies if their costs of raw materials continue to decline. An index of commodity prices, the S&P GSCI, is down 28 percent from its high in June 2022 but still 37 percent above its prepandemic level of March 2020.
Consumers complained about price increases during the pandemic but bought stuff anyway for the most part. Some clearly believed, and said, that companies were ripping them off but may have felt they had no choice but to pay up. Others may have assumed that the price increases were justified by supply chain disruptions and the like.
Whether companies can earn wider profit margins now that costs are easing will depend in part on whether consumers will start to rebel. A YouGov poll of 1,000 Americans in June found that 61 percent blamed “large corporations seeking maximum profits” for inflation “a lot,” more than they blamed any other factor, including the pandemic, the war in Ukraine, foreign oil, federal spending and union wage demands. That was up from 52 percent who said “a lot” last October.
My guess: Many companies will manage to widen their profit margins, although probably not as much as they’d like or for as long as they’d wish.
Elsewhere: In Senegal, a Fix for a Parasitic Disease
About 240 million people in the world suffer from schistosomiasis, a debilitating disease caused by parasitic worms that penetrate the skin. It’s common in sub-Saharan Africa as well as parts of South America and the Caribbean. Researchers in Senegal figured out that they could reduce the incidence of the disease by removing aquatic plants from ponds. The parasitic worms reproduce inside freshwater snails that feed on algae growing on the plants. The best part: The plants can be used for fertilizer and animal feed, giving farmers an incentive to do the weeding. A 23-person research team led by Jason Rohr, an ecologist at the University of Notre Dame, published its work in the journal Nature on July 12.
Quote of the Day
“The strategies that had insured our prosperity and security in the past — reliance on the U.S.A. for security, on China for exports and on Russia for energy — are either insufficient, uncertain or unacceptable.”
— Mario Draghi, former prime minister of Italy and former president of the European Central Bank, in the prepared text of the 15th annual Martin Feldstein Lecture (July 11, 2023)
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