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With commodity costs diving, can product prices be far behind?
Josh Hyatt, CFO Magazine
March 1, 2009
Rising commodity prices were a hallmark of the 2008 economy, and as they rose, the costs of many goods and services rose with them, creating what many claimed was an inflationary spiral. But a marked decline in commodity prices has yet to trigger a similar downward movement in product prices, including food.
That may be partly because rising commodity prices don't play as large a role in inflation as many believe. A study by Bart Hobijn of the Federal Reserve found that recent increases account for less than half of the growth of the personal consumption expenditures index.
Nonetheless, Jeff Noddle, CEO of grocery giant SuperValu, recently said that pricing is becoming a "battleground" between manufacturers and retailers. Grocers have been particularly vocal in asking food makers when lower prices for corn, rice, and other commodities will result in lower product prices. Most companies fear that investors will react negatively to any hint of margin erosion, says Nick Kalivas, vice president of financial research at MF Global Research.
With consumer spending dropping, however, "one company will decide to gain market share by cutting prices this year," predicts Paul Kasriel, chief economist at investment manager Northern Trust, "and others will follow suit. There's just a bit of a lag time."