Venture: A chicken butcher's price dilemma
For all of us who have bought milk or Corn Flakes lately, the most relevant economic news this week will likely be data on prices. Both the consumer price index and the producer price index come out this week.
Consumers may be feeling sticker shock at the store, but it turns out that businesses feel it even more so when they go to stock their shelves. And deciding how much of that cost to pass on to customers requires some fine calculations.
One chicken butcher in Chicago's Ukrainian Village is very familiar with that cost-price conundrum. Alliance Poultry Farms is tucked in among a jewelry store, a check-cashing place and a Walgreens on Chicago Avenue. Outside, it advertises "pollos vivos," reflecting its largely Spanish-speaking clientele.
Alliance Poultry is a small business, but it’s just as tied to the global economy as any multinational corporation.
Like most businesses these days, Alliance Poultry is dealing with higher costs. Co-owner Fayyad Abdallah says the price of cracked corn that he feeds to the birds has doubled in about a year and a half.
But it's the price of gas that's really making his costs go up. Abdallah says he's now paying about 20 cents more a pound for the organic chickens he buys from Amish farms in Wisconsin, Michigan and Indiana.
So in turn, Abdallah has to raise his own prices. But he's only increased his chicken price by 5 cents a pound.
"We don't want to go up that much because right away, customers would notice that there's a big increase and then they'll be questioning, and then they might not come back again," Abdallah says. "So I'd rather lose a few cents a pound than lose a few customers."
That calculation is something many businesses have to weigh.
Chad Syverson is professor of economics at the University of Chicago Booth School of Business. He says producer prices, which are essentially wholesale prices, and consumer prices are correlated but don't move in lockstep. Producer prices have bigger swings up and down than consumer prices. He says it's something of a riddle why that is.
One reason, Syverson says, is so-called "menu costs." The name comes from the cost restaurants bear when they actually have to print up new menus with new prices. But the idea translates to all businesses - there are costs involved in researching and setting new prices.
Syverson says businesses decide to raise prices when they decide that their own higher costs aren't temporary.
We all know one area where higher costs seem to hit us right away - at the gas pump.
That’s where we are this week for our Windy Indicator, getting a read on the wider economy from one little sliver.
Are higher gas prices changing people’s buying habits?
Yared Alemu manages a Shell station in Chicago’s Edgewater neighborhood.
"Before, people filled up all the way," Alemu says. "Now they just give you 20 bucks, 30 bucks to fill up and that’s it."
So are people driving less these days?
Let us know how you're adjusting to higher gas prices - leave a comment at the end of this story.
Next week, our Windy Indicator checks out the lamb shanks.