Falling prices are worse for employment than falling sales

On the back of news that producer prices are falling, a warning has been issued about the dangers of deflation to employment prospects in this country. According to pricing specialists Winkler International, a falling off in prices in far worse for employment than a falling off in sales.

The figures (illustrated) speak for themselves. `Suppose the company shown is a small one, with sales of £1 million per year,’ says managing director John Winkler. `Suppose it needs a 5% profit rate to survive. If it loses 5% of its sales, it only needs to save £25,000 a year to maintain its profit margin. Because it is selling few goods, its production costs are also reduced.

`But if the company loses 5% of its prices, due to deflation, then producing the same amount of goods as before makes no profit. To get back into its minimum profitability, it must save £50,000 a year.’

The implications for employment prospects in these two scenarios are clear. `This is why deflation is twice as bad for us as recession,’ says Winkler. `We have not experienced it since the thirties. When prices fall, companies must get their costs down and sooner or later they will have to cut staff. This is why deflation always leads to recession. The combined effect of both is a depression. Ask the Japanese.’

Winkler goes on to say that companies are often their own worst enemies, because they allow their staff to offer price cuts and discounts which may be unnecessary. `This is particularly true for companies selling to industry.’ He concludes by citing the example of how shopkeepers, in contrast, get things right, by keeping prices high if they can whilst giving the appearance of offering low price deals.

Like more information? Then you can obtain a copy of the company’s research report `British Pricing Weakness’ from the company’s Website at http//www. winkler.co.uk /profitbuilder.

{{TABLE 1Here is how a falling off in prices is worse than a falling offin sales.

Before After recession After deflation Lose 5% sales Lose 5% prices

Sales revenue 100 95 95Cost of goods 50 47.5 50Overheads 45 45 45Net profit 5 2.5 Zero}}