As Demand Picks Up, Prices Are Sure To Follow

The economy seems to be on a rebound. But as demand picks up, prices are sure to follow.

Bank card delinquencies fell significantly in the fourth quarter of 2010, below the 15-year average, according to the American Bankers Association, who reported that 9 of 11 loan categories showed reduced delinquencies.

Delinquencies rose for home improvement loans. Home equity loan delinquencies were unchanged at 4.05%.

The economy has shown plenty of promising signs lately:

• Unemployment dropped to 8.8% in March.
• Nonfarm payrolls added 216,000 jobs in March, the largest increase since May.
• The composite delinquency ratio improved in the fourth quarter of 2010, the latest period for which data is available, to 2.68%, a drop of 33 basis points from the previous quarter.

Consumers are returning to work and paying bills on time, even as they are borrowing more. Paying for auto and student loans seems to be a priority. But just as Americans are paying down debt, prices are starting to rise again.

The Federal Reserve’s policy of quantitative easing has raised inflation worries, but those fears have, so far at least, been mostly unfounded. But the ABA warned that food and energy costs, which are more volatile than the prices of most other goods, could see big rises. Even a recent 2% cut in payroll taxes may not give consumers enough extra cash to offset rising prices, the ABA said in a statement.

As demand recovers and the cost of raw materials goes up, retailers are planning to raise prices. The price of cotton has more than doubled in the past year, according to The Associated Press, and the cost of synthetic fabrics has gone up 50%. Meanwhile, gas prices are inching up steadily. The U.S. average price was $3.68 a gallon on April 4, up 86 cents from a year ago, according to the U.S. Energy Information Administration.

Increased demand may mean higher prices, but it also means more jobs, and thus more people with money to spend. The economy has been rocky since the recession officially ended in June 2009. But maybe the virtuous cycle of consumer demand is finally kicking back into gear.

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