Higher Prices Ring in with the New Year

A-B, Pepsi among those planning increases

Published in CSP Daily News

NEW YORK -- 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, according to a report from Bloomberg News.

Firms 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 businesses struggled to recover higher costs for energy and raw materials, and some were forced to discount. Both Philip Morris USA and R.J. Reynolds also have [image-nocss] announced increases in the past month.

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 ranging 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. Prices fell 0.3% 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 CFO 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% 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.

The Fed's preferred inflation gauge -- the personal consumption expenditures index excluding food and energy -- is forecast to rise 2.1% next year, according to the median forecast of 73 economists surveyed by Bloomberg News.

That's above the 1% to 2% 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% gain over the 12 months ended Nov. 30.

"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," said Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Conn. "When consumers are mostly employed and their incomes are going up, they're more inclined to accept some price increases."

Clorox, the largest household-bleach maker, cut its 2005 profit forecast in October because of higher prices for oil and resins. Now, the Oakland, Calif.-based company plans to raise prices on about 40% of its products next month.