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Ensuring the (corporate) price is right

| Posted by: Paul Donovan | Tags: Paul Donovan Weekly

  • Is corporate pricing power increasing? The answer to this is not found in consumer price data. Most companies do not sell to consumers – the long supply chains that stretch around the world comprise companies selling to other companies. Consumer price data includes things like housing rental costs that have little direct relevance to corporate pricing power.
  • Producer price data is the best indication of corporate pricing power. Core producer price inflation (which excludes energy and sometimes food or construction prices) has been rising in the US, Europe and Japan for between three and twelve months. This is likely to continue. Business sentiment surveys show that companies intend to raise prices in the next three to six months; expectations of future prices received are positive and rising. While business sentiment surveys are not precise indicators, the trends signaled in the detail are more reliable. UBS's survey of corporate leaders also indicates an intention to raise (producer) prices. 
  • Choosing the right measure of corporate pricing power may be more important in the future. A trade tariff would increase consumer prices but not improve corporate pricing power, for instance. Corporate pricing power is increasing, but investors need choose their inflation measure carefully.