THE UNSUSTAINABLE TRACK

David Merrefield

The economy is going along so well it hurts. That's the paradox spelled out in this week's front-page news feature entitled "Deflated Hopes."

The feature is an analysis of how food-price deflation undermined the increase in same-store sales during the calendar first half. The top 20 chains reported that same-store sales -- the measure that really tells the story about sales -- were up 1.3% during the most recent quarter reported, compared with 2.1% for the same period a year earlier. It was during the latest reporting period that deflation apparently peaked. One securities analyst quoted in the article said deflation was perhaps at the rate of 1% during the first half, but is now moving toward 0.5% and will continue to abate.

If we all lived in a better world, we would chuckle about this and say that if same-store sales decline for any reason, it just means it's time to get back to work and find a way to pump up sales. But the world doesn't work that way when economic realities are factored in.

Among the realities is that commodities prices increased sharply last year, partially sponsoring larger same-store sales increases. In contrast, there has been a decrease in commodity prices this year. Commodities constitute raw materials of about 20% of everything sold in a supermarket.

The other reason prices are flat to declining is that consumers have no tolerance for price hikes and reward retailers who find a way to avoid them. Retailers are resorting to heavy measures to reduce costs which, in turn, permit lower price points. For instance, another news article this week -- on page 7 -- shows that Pathmark Stores in the Northeast will outsource distribution, a step also taken in recent weeks by the neighboring King Kullen Grocery Co. chain and others.

Stepping into this scenario last week was Federal Reserve Chairman Alan Greenspan, who told the House Budget Committee that the economy is on an "unsustainable track"; by that, he was suggesting that the past six years or so of low to nonexistent price inflation may be over.

His theory is that in many markets, labor supply is short so labor prices will be bid upward. And, at the same time, as we've seen, consumers are intolerant of increasing retails. Those opposing factors will take a bite out of profits, putting irresistible pressure on retailers to increase price points, regardless of what consumers may want. And, if prices creep up, inflation may stage a return.

The Fed chairman's observations spooked Wall Street a bit last week and no doubt the "unsustainable track" will become the newest mantra for economists. By the way, it was the same Fed chairman who earlier this year issued his assessment that the stock market was being driven up by a spirit of "irrational exuberance." Wall Street swooned upon exposure to that pronouncement and the Fed chairman soon repented of uttering it.

In any case, the paradox about last week's observation on inflation is that food retailers have always depended on a little food-price inflation to make results look stronger and maybe to mask one or two inefficiencies in the system.

As a result, most retailers will almost certainly welcome the return of a little benign inflation.