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Low Inflation--and Low Profits


Federal Reserve Chairman Alan Greenspan's recent remark in a speech in Singapore that "inflation is not a significant problem at this moment" hasn't allayed the fears of inflation hawks. Even if the economy bounces back by early next year, as the stock market revival implies, many still worry that rising energy prices and surging unit labor costs (up at a 6.3% clip last quarter) could spark a pickup in inflation.

Economist Stephen Roach of Morgan Stanley Dean Witter & Co. is dubious, however. "The lack of pricing leverage, particularly among U.S. companies," he says, "is a hallmark of today's economic environment that is likely to keep inflation at bay for some time."

Pricing leverage, of course, refers to the ability of companies to pass on cost increases via higher prices for their products and services. To show how such leverage has changed, he compares the gaps between average increases in consumer prices and increases in both labor costs and producer prices in two periods: 1990 to 1996 and 1997 to 2001.

In the first period, average annual rises in the consumer price index exceeded gains in unit labor costs and producer prices by 1.5 and 1.3 percentage points, respectively. Since 1997, however, these percentage-point spreads have shrunk to 0.47 and 0.73--pointing to a loss of pricing leverage that was less crucial for profits when the economy was in overdrive but now looms as a major hurdle for business.

Meanwhile, Roach's analysis of similar data for other industrial nations indicates that the gaps between consumer price inflation and increases in unit labor costs and producer prices has either widened or stayed stable in recent years. In other words, he says, "the U.S. stands largely alone in experiencing a loss of pricing leverage."

What accounts for this disparity between the U.S. and other advanced nations? The strengthening of the dollar, which has enabled other nations to undercut U.S. prices more easily, is one key factor, Roach believes.

But another, he argues, has been America's lead in market deregulation and in cracking the rigidities of union-dominated labor markets. The competition spawned by such changes--along with the competitive pressures unleashed by the strong dollar, globalization, and the technology revolution--have all sapped U.S. business' traditional ability to raise prices.

Oddly enough, Roach finds that some of other nations' apparently greater pricing leverage stems from recent disinflation overseas in both labor costs and producer prices--suggesting that continuing deregulation in product and labor markets is starting to reduce many foreign companies' costs. As trade liberalization and globalization continue, however, he predicts that such companies will also face a decline in their own ability to pass on costs.

For now, however, the message of America's lack of pricing leverage seems twofold: It suggests that earnings will remain seriously constrained even if the economy picks up steam--and that the U.S. will be more of a disinflationary place than the rest of the world. Ask Americans which behavioral problem most threatens their physical and economic health and they are likely to answer smoking or drinking. According to a study in the British journal Public Health, however, the behavior leading to obesity--poor eating habits and lack of exercise--may well represent a larger potential threat to the public's health and well-being.

The study by Rand Corp. researchers Roland Sturm and Kenneth Wells is the first to compare the negative health effects of obesity with those of smoking, heavy drinking, and poverty. Based on a nationwide survey of some 10,000 people, it finds that 36% of adult Americans are overweight (20% to 30% above normal) and 23% are obese (more than 30% heavier than normal). By contrast, only about 20% of adults are daily smokers, and 6% are problem drinkers.

More important, the results of the study indicate the health risks of obesity are actually as great and often considerably greater than those caused by either smoking, heavy drinking, or poverty. That is, obesity is associated with just as many or more chronic conditions like diabetes, asthma, heart disease, and arthritis, and its impact on a person's ability to perform common tasks such as climbing stairs or carrying packages is at least as great.

Can the obesity epidemic be stopped? Economists have related the rise in obesity to changing incentives--the declining cost of food, the shift to more sedentary employment. While countering these incentives is difficult, the authors note that public education and other initiatives have helped to dramatically reduce the incidence of smoking in recent decades. It's time, they believe, to uncork similar efforts to combat obesity. For U.S. executives working overseas, the priciest places to live are Seoul, Tokyo, Moscow, Singapore, and London. That's the finding of Runzheimer International's latest survey of living costs around the globe, based on the needs of a middle-class U.S. family.

The most surprising aspect of the report in view of the superstrong dollar is the high relative cost of living for execs working in New York, which ranks fourth in a list of 25 cities. (New York is also about 45% more expensive than Chicago.) Some of the cheapest postings this year are Sydney, Bombay, Toronto, and especially Johannesburg--where living costs currently run about 60% below those of the Big Apple.


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