American companies are raising prices briskly

President Trump is giving many businesses an unexpected benefit on top of lower taxes and regulatory relief: He’s helping to restore their pricing power.

By pouring hundreds of billions of dollars’ worth of tax cuts and extra government spending into an already stretched economy, Trump is fostering an environment where companies such as conglomerate 3M Co. can raise prices because demand for their products is strong.

“The power is with the seller,� said Chris Williamson, chief business economist at consultants IHS Markit Ltd.

That’s a turnaround from the last decade, when executives often bemoaned their inability to lift prices because of their fear of sacrificing sales. The shift will help them pad profits that are already surging thanks to lower taxes.

It’s also good news for Federal Reserve Chairman Jerome Powell and his colleagues, who have struggled to lift inflation to their 2% target and hold it there. Policymakers took note of reports of a return of pricing power at their July 31 to Aug. 1 meeting, according to the minutes of that gathering released last week.

Purchasing power

It might not be so welcome to workers, who have had trouble winning bigger wage gains even though unemployment is near a multi-decade low. Faster price rises already are eroding what purchasing power they have — a point some Democratic opponents of Trump have made as November congressional elections approach.

Average hourly earnings adjusted for inflation fell 0.2% in July from a year earlier, the weakest reading since 2012.

The political debate highlights the chicken-or-egg question at the heart of the inflation process that Morgan Stanley Chief U.S. Economist Ellen Zentner and others have noted: Which comes first, stepped-up price increases or bigger pay raises?

Some economists argue that rising prices come first, as companies seize opportunities to buttress their bottom lines when demand is strong. Workers then seek higher wages to make up for the purchasing power they’ve lost to rising inflation.

Others contend that wages lead the way as a tight job market prompts companies to boost salaries for coveted workers. Companies follow that with price increases to cover growing wage bills, boosting inflation in the process.

The tariff effect

Complicating the picture this time are the tariffs Trump has slapped on a variety of imports from China and elsewhere. Those are raising costs for businesses and putting pressure on them to raise prices in response.

Data due out Thursday are expected to show that inflation picked up in July. The personal consumption price index that the Fed targets probably rose 2.3% in July from a year earlier, the most in more than six years, according to the median estimate of economists surveyed by Bloomberg News. After stripping out volatile food and energy costs, the core index probably rose 2% in July, compared with 1.9% in June.

Recent business surveys suggest that companies see greater scope for boosting prices.

Non-manufacturing firms told the Philadelphia Fed this month that they expect to raise prices 3% in the coming year, up from a 2% increase they forecast in May.

A separate survey of both manufacturing and non-manufacturing companies by IHS Markit found that their average selling prices rose at the fastest rate of the nine-year-old expansion in July before the pace eased a bit in August.

‘Very happy’

That mirrors 3M’s experience. In the second quarter, the St. Paul, Minn., maker of everything from Post-it notes to copper cabling reported its biggest increase in its U.S. selling prices in more than four years.

3M is “highly confident that our price increases will more than offset whatever we see for raw material headwinds for the year,� including from higher tariffs, Chief Financial Officer Nicholas Gangestad told Wall Street analysts July 24.

Sealed Air Corp., the maker of Bubble Wrap and other packaging materials, also is finding it can raise prices without a big backlash from its customers.

“Where I’ve been very happy with the company’s success is our ability to pass along price increases to our customers for our relevant input cost,� William Stiehl, chief financial officer of the Charlotte, N.C., company, told analysts Aug. 7.

Of course, not every company is raising prices. Walmart Inc., the world’s biggest retailer, has been holding the line on prices — and in some cases reducing them — even as its consumer-staples suppliers raise theirs.

“There is obviously some cost inputs rising. We’ve got risk of tariffs and transportation costs, et cetera,� Dan Binder, vice president of investor relations for the Bentonville, Ark., company, said in an Aug. 16 earnings call. “This is all in our plan. We are not going to get beat on price.�

Such worries about losing out, though, may fade if the economy continues to grow solidly and consumer demand remains strong on the back of Trump’s fiscal stimulus.

“The tightening labor market and tightening product market will show through in a gradual pickup in inflation,� said Peter Hooper, chief economist for Deutsche Bank Securities.