Today’s 1.7% surge in October producer prices, the largest increase in 14 years, evoked the usual collection of absurd responses by many Wall Street pitchmen hiding behind titles that include the word “economist.” One popular story line argues that the Fed is not concerned about rising producer prices because producers are not able to pass on these increases to consumers. This sophomoric view ignores the basic economic fact that all costs must ultimately be born by consumers. Rising prices work their way through an economy form the bottom up. Ignoring rising producer prices is the economic equivalent of a coal miner ignoring the death of the canary.
For many reasons producers may in fact be initially willing to absorb increasing costs, but ultimately, if cost increases persist, they will be forced to pass them on to their customers. Wall Street economists argue that the U.S. economy is now so competitive, and consumers so savvy, that such price hikes are impossible. They suggest that any company that raises prices in response to higher costs will lose sales, as customers react to higher prices by buying less. However, companies are profit maximizers, not charitable institutions. If a business can not pass on higher costs at a given level of output, it will reduce overhead, in an effort to restore maximum profits at lower sales volumes.
In the end, both total sales and profits will fall, as America businesses sell fewer goods at higher prices. Real sales and GDP will fall, while unemployment and consumer prices will rise. The ultimate result will be a declining standard of living for average Americans.