Sticky Prices

Hi Everyone:

This week's topic is sticky prices. You may be wondering what are sticky prices? Sticky prices is a new terminology for what has happened to the price of just about everything we buy as consumers today.

As I mentioned last week, last year the price of oil/gasoline went through the roof and then came the ramifications that went along with it. One of those ramifications is now called sticky prices. We are all painfully aware of how many companies have increased their product prices. The following are just a few examples of sticky prices:

Example 1) When a garbage or oil/propane company adds a monthly fuel surcharge to your monthly bill. This charge is supposed to cover the added expense of the increase in gasoline/diesel costs to deliver their product to your home.

Example 2) When any type of manufacturing company increases the cost (due to the increase of the cost of the energy needed to produce and package the product) of their product to the retailer who in turns passes on the increases to the consumer.

Example 3) When a manufacturing company (in this example a food manufacturer) decreases the amount of their product from say 16 ounces to 12 ounces and charges the same amount as they did before the decrease. Now this started with coffee years ago and has now proliferated to almost every product in your local grocery store.

Sticky prices are when the price you pay for something increases but then the price does not go back down. So what happened to the cost of these products to us, the consumers, when the cost of energy decreases? The cost of a barrel of oil has dropped approximately $100 to $47 per barrel, as of Friday, 3/13/09. If the theory holds any truth that the price of whatever goes up with the increase cost of energy, what happened when the price of the cost of energy decreased? In this example.............................ABSOLUTELY NOTHING! The prices remain the same! That is what sticky prices are. They are stuck at the higher price or the same price with less product, which translates into a price increase.

So why are the prices not decreasing? The answer is a difficult one. First of all, companies do not like to decrease prices on a whole, except for temporary promotional sales. Secondly, since we are in a recession, a lot of consumers have less money to spend and consequently do not buy as much. When consumers buy less, companies sell less and then they lay off employees. Laid off employees obviously can not buy as much as they did when they were employed. This is a vicious cycle that seems to have no end in sight.

So what is the answer? Two examples come to mind....... Walmart and McDonald's. These two companies have actually done well in this recession. Why? Walmart's business plan has always been to sell products for less. In a recession, people who may never have been in a Walmart, now shop there because of their lower prices. McDonald's food prices have value that consumers seem to be able to afford.

In a recession, there is no common sense to keep prices artificially high. In my opinion, all it will take is for other companies to start lowering their prices and others will follow suit and for companies to end their fuel surcharges Then sticky prices won't be stuck anymore!

Talk to you next week.