Can the price of diapers affect another company’s cost of capital? It’s possible, and here’s how.
For the first time in decades, consumer-product companies are getting ready to push through price increases, says Bloomberg. Kimberly-Clark Corp., Clorox Co., and Procter & Gamble Co., for example, are among those that have announced price hikes to recoup higher raw-material costs.
Predictably, the companies are encountering strong opposition from their behemoth retail customers, including Wal-Mart Stores Inc. and Target Corp. However, as this clash of the Titans plays out, it could wind up having a big impact on interest rates in general.
Indeed, if the manufacturers are able to push through price hikes to their customers, there’s a good chance the retailers will pass along some of those price increases to consumers. This is called cost-push inflation.
In turn, rising inflation could cause the Federal Reserve Board to increase interest rates. The Fed has already raised interest rates 200 basis points in the past year on fears of rising inflation.
Some economists speculate that if the Fed sees consumer-product companies easily pushing through price increases, the board will be more likely to extend its inflation-fighting strategy and raise interest rates. Such a rise would increase the cost of capital for any company trying to raise money in the bond market. So a price hike for diapers could eventually cause the cost of capital to rise.
But retailers aren’t ready to accept any price increase that manufacturers hand them. “Over the past few years, the pricing power in the marketplace has shifted away from the manufacturer to the distributor-retailer like Wal-Mart,” Barry Bosworth, a senior economist at the Brookings Institution, told Bloomberg. “These chains are so big they have the upper hand in setting prices. If products don’t sell, they eliminate them from the shelves.”
The wire service notes that during congressional testimony on June 9, Federal Reserve chairman Alan Greenspan said that “at the moment, we are finding little evidence of inflationary pressures on the product side.” And while Greenspan cited “some evidence” that pricing power has been increasing, he said overall inflation remains “modest.”
Meanwhile, Clorox announced a 9 percent price hike for Clorox Liquid Bleach, while P&G and Kimberly-Clark are each planning 5 percent increases for their diaper lines during the next two months, says Bloomberg. Further, Gillette expects to raise battery prices by 6 percent, and Energizer Holdings Inc. will boost them by 7 percent. “We have not taken enough pricing to recover margins,” Clorox chief executive Gerald Johnston told investors May 11, according to Bloomberg.
Product makers used to be leery about price increases because management believed the hikes would cost them market share, Bob Goldsborough, an industry analyst at Ariel Capital Management Inc., told the wire service. Now, however, there’s a collective feeling among manufacturers “that they have to take price increases and help make them stick.”