Is That a Higher Price Tag?

Companies gingerly start to charge more as their own costs rise

U.S. companies have spent the last few years trying every strategy possible to avoid jacking up prices. With unemployment high and consumers pinched, price hikes looked like a quick way to lose market share.

Yet one research firm says midsize retailer and restaurant chains are finally raising consumer prices. According to a quarterly survey by Barlow Research Associates, 53 percent of companies with annual sales of $10 million to $500 million have lifted prices during the last 12 months. This comes as U.S. inflation, excluding food and energy costs, accelerated at an annual pace of 1.8 percent in July, the biggest such gain in more than a year, according to Labor Dept. data released on Aug. 18.

The big surprise is labor costs, which climbed at their fastest rate in almost three years—up 1.3 percent in the quarter ended June 30, compared with a year ago, Bureau of Labor Statistics data show. “This is an early sign that even with high unemployment, labor costs are starting to pick up, giving companies an incentive to raise prices,” says Peter Newland, an economist at Barclays Capital in New York. Labor costs are the biggest component of business expenses, he says.

How could labor costs go up with such a vast pool of idle workers to draw on? Newland points out that structural unemployment—the number of jobless workers not actually employable because of outdated skills, an inability to move, and other factors—has risen. So the spare capacity in parts of the labor market is low, while productivity growth, which was strong immediately after the recession, has eased considerably. “Adding the two together, labor costs are now rising,” says Newland.

Of the 149 public and private retailers and restaurants in the Barlow survey, 61 percent said they plan more price increases during the next 12 months. This indicates a “significant change” in attitude from the previous year, when 41 percent had such plans, according to John Barlow, president and founder of the Minneapolis-based researcher.

Christopher & Banks, a midrange women’s apparel retailer, raised prices by about 20 percent for its fall assortment. Casual Male Retail Group bumped prices up 5 percent in the first quarter and made more changes in the second. Diners at BJ’s Restaurants and Famous Dave’s of America will pay about 2 percent more for some menu items, the companies say.

Federal Reserve policymakers have acknowledged the recent acceleration in consumer prices. The Federal Open Market Committee has lifted its forecast for core personal consumption expenditure inflation, the Fed’s preferred measure, to about 1.7 percent from about 1.2 percent in January.

Christopher & Banks has “seen acceptance” of its higher prices, President and Chief Executive Officer Larry C. Barenbaum said in a June 30 conference call. That may not be the case at Kirkland’s, which sells home accessories and gifts. The Nashville (Tenn.)-based retailer plans to raise prices in the next year, though it must balance these changes with a “reluctant customer,” President and Chief Executive Officer Robert E. Alderson said on a May 20 conference call. “I think we’re trying to be very selective if we do have price increases,” he said.

Other companies also may face resistance from consumers weary of continued high unemployment, Newland says. Companies have every incentive to raise prices; consumers still have every incentive to push back.


    The bottom line: With margins pinched by higher transport, food, and labor costs, companies are raising prices despite weak consumer spending.

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