Dec. 27 (Bloomberg) — Anheuser-Busch Cos., the world’s largest brewer, plans to toast the New Year with higher prices for Budweiser and Michelob. Pepsi Bottling Group Inc. may drink to that too.
Companies such as DuPont Co. and Clorox Co. are joining the party with price markups of their own, celebrating the return of pricing power after a year in which many struggled to recover higher costs for energy and raw materials, and some were forced to discount.
Raising prices is one thing; making them stick is another. Economists say U.S. businesses stand a better chance of getting higher prices in 2006 because unemployment is low and factories are operating near capacity. That already has the Federal Reserve on watch for production bottlenecks that might heat up inflation.
“Sellers have more pricing power than buyers now,” said Norbert Ore, chairman of the Institute for Supply Management’s Manufacturing Business Survey and director of procurement for Atlanta-based Georgia-Pacific Corp., which makes products from cardboard boxes to plywood. “Sellers are able to pass through higher costs” because “utilization of operating capacity is high, growth is fairly high.”
Anheuser-Busch skipped a price increase this year and used discounting to maintain its share of the U.S. beer market. Beer prices fell 0.3 percent in the first 10 months of the year, according to the Labor Department. Now, St. Louis-based Anheuser-Busch has a new strategy.
“We will be raising prices or reducing discounts on the majority of our volume in early 2006,” Anheuser-Busch Chief Financial Officer W. Randolph Baker said in a conference call Nov. 29. “We believe the industry needs to roll back discount promotions that in some cases had gotten excessive.”
Little of this year’s 50 percent increase in wholesale energy prices has found its way into prices of other goods and services, letting the Fed on Dec. 13 describe inflation outside of food and energy as “relatively low.” At the same time, the central bank cautioned that inflation pressures remain.
“Some further measured policy firming is likely to be needed” to keep inflation under control, the Fed said. “Possible increases in resource utilization as well as elevated energy prices have the potential to add to inflation pressures.”
The Fed’s preferred inflation gauge — the personal consumption expenditures index excluding food and energy — is forecast to rise 2.1 percent next year, according to the median forecast of 71 economists surveyed by Bloomberg News.
That’s above the 1 percent to 2 percent comfort zone preferred by Ben Bernanke, who is awaiting Senate confirmation to take over as Fed chairman Feb. 1, and is higher than the index’s 1.8 percent gain over the 12 months ended Nov. 30.
`Keep the Fed Moving’
While policy makers signaled at the December meeting that they may soon stop raising interest rates, “rising core inflation and continued above-trend economic growth will keep the Fed moving most of next year,” Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Connecticut, said in an interview.
The U.S. economy has expanded faster than its 20-year average of 3.1 percent for the past 10 quarters, pushing the U.S. jobless rate to 5 percent, near a four-year low, and factory capacity utilization to a five-year high. The economy will expand 3.4 percent in 2006, according to the median estimate in a Bloomberg News survey of 71 economists.
“When the economy’s weak, there’s always a potential competitor who will undercut you on price, but when everybody’s doing decent business, there’s not as much urgency on the pricing front,” Stanley said. “When consumers are mostly employed and their incomes are going up, they’re more inclined to accept some price increases.”
The central bank will probably raise its target interest rate to 4.75 percent from the current 4.25 percent by May 2006, according to trading in federal funds futures at the Chicago Mercantile Exchange. Stanley forecasts a 5.5 percent rate by year-end.
“The Fed’s going to have to go much more than the market consensus is expecting,” Richard Yamarone, chief economist at Argus Research Corp. in New York, said in an interview. Yamarone said the core PCE price index will surge 3 percent next year and the Fed will raise the benchmark rate to 5.5 percent.
“I don’t think core inflation is going to be as subdued as many people believe,” he said.
Clorox, the largest household-bleach maker, cut its 2005 profit forecast in October because of higher prices for oil and resins. Now, the Oakland, California-based company plans to raise prices on about 40 percent of its products next month.
Pepsi Bottling Group of Somers, New York, the world’s second-largest soft-drink bottler, plans to raise prices by 2 percent to 3 percent to cover higher plastic and aluminum costs.
DuPont Titanium Technologies, a unit of Wilmington, Delaware-based chemical maker DuPont, says it will raise prices on the white pigment titanium dioxide Jan. 1, as “improving market dynamics” let it pass along higher costs.
A third of all small businesses say they’ll raise prices in the next three to six months, according to the National Federation of Independent Business.
Not all economists agree that core inflation will accelerate next year and force the Fed to continue raising rates. The core inflation forecasts in the Bloomberg survey ranged from a low of 1.4 percent to 3 percent. Fed funds forecasts ranged from 3.5 percent to 6.25 percent, the widest range between high and low forecasts that the Bloomberg survey has found since 1997.
“The near-term outlook for inflation depends very importantly on whether you assume that firms are able to pass through these higher energy” prices, said Brian Sack, senior economist at Macroeconomic Advisers LLC in Washington and former head of monetary and financial markets analysis for the Fed. “The evidence here is very mixed.”
Economists such as David Rosenberg of Merrill Lynch & Co. in New York doubt that companies will be able to make price increases stick.
“The economy is moderating,” said Rosenberg, who predicts economic growth will slow to 2.5 percent next year from 3.5 percent this year. “The forces of productivity and globalization have acted as very powerful disinflationary forces.”
Richmond Fed President Jeffrey Lacker said last week it’s “encouraging” that little of this year’s jump in energy costs has passed through to prices for other goods and services,
Still, he said, potential price pressures remain a risk.
Energy prices “have built up to the point where firms feel compelled to pass them on,” he told reporters Dec. 22 after a speech in Washington. “That’s the risk that’s most pressing right now.”