The Inflation Factor

What’s inflation got to do with the price of goods in America?
Not much, say industry experts . . . At least, not yet.

While inflation and its potential to wreak havoc in the business world has been a hot topic lately, NPD’s Industry Experts have been monitoring prices in the industries they track to find out what’s really happening. And according to what they’re seeing, it seems inflation may not – or not yet, anyway – be a real threat to manufacturers, retailers or consumers.

Technology – More Micro Than Macro

Across many of the industries tracked by The NPD Group, fundamentals of the micro-market are far important than the overall macro-economy. Nowhere can this fact be seen more clearly than in the consumer electronics and technology business. The fundamentals of electronics markets – such as outsourced manufacturing, intense competition, rapid growth curves and the need for mass market volumes – are all likely to keep inflation at bay regardless of the ups and downs of costs in the larger economy.

In fact, a recent analysis shows that during the month of May 2004, retail prices for a market basket of technology items fell 3.1 percent, the sharpest sequential drop since last November. The overall value of the basket of 27 key electronics items now stands at $12,362, down more than $1,000 since the start of 2004 and almost $2,600 since May 2003.

“Electronics pricing is always the end result of one of three trends: lowered product costs, a desire to quickly reach economies of scale, and competition factors,” said Stephen Baker, NPD Techworld director of industry analysis. “To the extent that those factors are influenced by macro forces in the economy then it is possible for electronics pricing to be facing some pricing pressure, but that is more likely to be in the form of slowing price declines versus price increases.”

Video Games: Inflation-Buster?

As with consumer electronics categories, the threat of inflation has, according to NPD data, had little or no impact on product price points in the video games industry. The overall trend is that average retail prices for the combined video games products have trended downward for the past three years. The video games software category – which is the most purchased and by far the largest category by volume – is also showing average selling price declines of more than $3 per game sold.

“The video games industry will not see another major industry-wide price increase until 2005 or 2006, as the cycle comes full circle into another generation of console products,” said Richard Ow, NPD Funworld director of games. “Two years ago, video games were viewed as ‘anti-recessionary.’ In 2004, perhaps that moniker might well be shifted to ‘anti-inflationary.’”

Apparel Prices – How Low Can They Go?

Another market segment that belies current worries of impending inflation is the fashion and apparel industry. Pricing in apparel has been declining for the past three years, with the average retail price in most categories falling three to five percent on average. While many industries go through price increases, and as the cost of living continues to rise, the competitive landscape in apparel has actually led to price deflation.

“Mass merchants and discounters are competing with the upper end of the market by offering higher quality fashion at lower prices,” said Marshal Cohen, chief industry analyst for The NPD Group. “In fact, many consumers who traditionally shop in high-end luxury stores are now shopping at value stores as well. More than half of all consumers who shop for clothing in department stores also shop the mass channel.”

Housewares and Beauty -- Higher Prices? Yes. Inflation? No.

“Sustained increases in the general level of prices for housewares and appliances have yet to be noted by NPD Houseworld,” said Peter Greene, vice president and general manager of NPD Houseworld. “While there have been few, if any, inflation-related price spikes, there are several pricing trends worthy of discussion in this sector. These trends include slow signs of a strengthening economy fed by the continuation of a strong housing market.”

When reviewing prices at the point of sale, it’s clear that products are selling at higher price points within the major appliances market. Myriad factors affect the demand for – and ultimate growth of – higher priced goods, including increasing consumer confidence levels.

Similarly, while living through unstable economic times, consumer spending often shifts to more traditional brands because they offer greater reassurance and are perceived as good investments. But that’s not the case with the skincare category, in which traditional brands appear to be losing market share to newer, more expensive brands.

While average prices in skincare are on the rise, Timra Carlson, president of NPD Beauty, does not attribute that to price inflation: “Prices have been rising at record levels since 2002, but those price hikes are closely linked to the fact that high-end and technologically advanced products are selling better than less-expensive, more mainstream brands.”

Inflation Exception: Glorious (& Expensive!) Food

The one industry that NPD tracks in which inflation appears to play at least a minor role in pricing today is the food industry, and that’s becoming worrisome to restaurateurs, supermarkets and food and beverage manufacturers. After several years of food inflation running less than three percent, during the first part of 2004 consumers began to see food prices increase more quickly.

“Within the food market, there are two separate price trends that most Americans are concerned about, namely the increase in the cost of eating out and preparing in-home meals,” said Harry Balzer, vice president of NPD Foodworld. “The real question affecting consumer behavior is which food source – restaurants or supermarkets – is cutting more into the overall household food budget?”

Unlike the beginning of 2003, when restaurant prices were rising faster than supermarket prices, inflation today is causing spending at supermarkets to take a far larger chunk of the family food budget than restaurants. According to NPD Foodworld’s Average Eater Check data, restaurant prices are indeed rising, but at a steady rate. For example, the average meal check in 2002 was $5.84; however, in 2003, the average came in at $5.96.

Higher Gas Prices and Consumer Behavior

Of course, when the discussion turns to inflation, one can’t forget one crucial commodity: gasoline. In May 2004, retail gasoline prices were 35 percent higher, on average, across the U.S. than the previous year. A recent NPD survey, “Pain at the Pump,”  revealed that many consumers would be willing to shift to more economical driving behaviors, such as car pooling, purchasing a more fuel efficient vehicle, telecommuting, or canceling discretionary trips such as vacations, if the current high gasoline prices persist.

“Over time, consumers who are more focused on price have become less likely to buy more expensive grades of gasoline,” said David Portalatin, NPD Automotive Industry Expert. “They have also flocked to lower- priced alternative retail channels, such as grocery and mass merchants that use discount prices for gasoline as an incentive to entice customers to shop their stores.”

While the price of gasoline necessarily affects the cost at the pump, it also has a tendency to raise the cost of other commodities, due to increased costs for shipping. So while runaway inflation might not have affected the prices in most of the industries tracked by The NPD Group, it remains to be seen whether – or how much – continued higher fuel prices might also fuel inflation in other industries.

For more from our Industry Experts, visit the NPD Worlds . . .

www.npdfashionworld.com
www.npdfoodworld.com
www.npdfunworld.com
www.npdhouseworld.com
www.npdtechworld.com