As the battle over inflation vs. deflation risks rages, with the deflationista’s apparently winning given the U.S. 10-year yield at 2.53%, we couldn’t help but notice this snippet of retail commentary from JP Morgan’s Charles Grom:
Despite rising input costs . . . meat remains a promotional category. We believe that, despite increasing meat procurement costs (July PPI up 15.2% YOY), food retailers have more/less continued to follow an offensive pricing strategy. Said differently, most are not opting to pass 100% of inflationary price increases forward to customers. To clarify, out of the 5 stores we visited in August, the price on meat and poultry items (ex. eggs) in our basket increased 2.3%, on average, from July (3 locations increased, 2 decreased prices). From an SKU perspective, out of the 20 total SKUs (4 SKUs per store) we only observed price increases on 8 items (average increase of ~18.8%) and note that prices remained flat on an additional 6 items.
This runs along the theme of the world’s current perplexing situation– Rather robust commodity prices, yet low inflation in major developed nations such as the U.S.. So far competition has prevented food retailers from passing on their rising input costs, but when might this end? At some stage, they have to pass it on, if input prices continue to rise.
(Via JP Morgan, Charles Grom, 1 Sep 2010)