Oil slides but high grocery bill sticks

Worries over a global recession have pushed the price of oil to its lowest in over a year. Don't expect the same for a bottle of beer, a tube of toothpaste or a box of cereal.

Blame “sticky” prices.

That's what analysts call it when companies slap higher prices on products and keep them there even though the rationale for the hikes – such as soaring oil prices – is gone.

The falling cost of oil could help companies pad their profit margins as they pay less to make and transport goods. But it won't mean a break on the average grocery bill.

The price of consumer goods typically lags behind the price of key inputs like oil and wheat, said Chris Lafakis, an economist with Moody's “Consumer prices don't change near as fast, because they are set by companies,” he said.

The opposite is also true: Companies hesitate to hike prices because it might push consumers into the arms of a competitor.

Meat companies like Tyson Foods, for example, have swallowed losses this year as ingredient costs rose because executives were fearful consumers would abandon their products if prices jumped too fast. Tyson's profit plunged 92 percent in the third quarter and the company said it didn't expect a rebound soon.

But once a price hike is in place, it virtually never goes away, Lafakis said. The one factor that can drive prices down is a drastic drop in demand, but few economists expect the global economic downturn to be so severe it would cause widespread deflation, he said. More likely is that inflation will slow or possibly flatten.

That was the case last month, when consumer prices were essentially flat, even as oil prices plunged.

The core Consumer Price Index, which eliminates food and energy prices, rose 0.1 percent, according to U.S. Labor Department figures. That was only about half the jump economists had expected, but it still lagged far behind the drop in oil prices. Crude oil has plunged more than 53 percent from its record high of $147.27 between July and October.

Companies also tend to price their products based on what their competitors are charging and not necessarily on what it costs to make them, said Lars Perner, assistant professor of marketing at University of Southern California's Marshall School of Business.

Coca-Cola is more interested in what Pepsi is charging for a six-pack than the cost of its ingredients, such as high fructose corn syrup, he said.

That means consumers are in a fix these days. Prices have been going up broadly across whole categories of products, meaning competitors have been hiking prices in unison. For example, both Anheuser-Busch and SABMiller's U.S. unit have been raising the price for beer, with neither too worried that the price hikes will push customers to its competitor. “They may be upset about it, but you really have fairly limited options as a consumer,” Perner said.

For prices to drop, consumers have to hope that companies' competitive juices start flowing again. The drop in oil and ingredient prices is creating a high-stakes game of chicken in the shopping aisle, Perner said.

If companies keep their prices at current levels, they can reap higher profit margins. But if one company starts cutting prices to lure customers from competitors, it could start a price war.

“As soon as the first (company) in a category reduces prices, the others will follow suit. But they're all hoping the other one doesn't” cut prices, Perner said.

There will be a bright spot for consumers this season as retailers offer selected, high-profile discounts to lure hesitant shoppers, said retail consultant George Whalin.

The motivation to cut prices was reinforced Wednesday when the U.S. Commerce Department reported overall retail sales dropped 1.2 percent in September, about twice what analysts expected.

Retailers are expecting one of the most dismal holiday seasons in years, Whalin said, and are promoting big sales, such as Wal-Mart's decision to cut the price of 10 hot holiday toys to $10 each.

But the big promotions don't mean retail prices will fall across the board, Whalin said. Most retailers ordered their current merchandise three months ago. With costs locked in, they will keep most prices as high as they can to recoup as much profit as possible from the slower traffic.