The U.S. recent has entered into a period of price stability with its lowest annual price increase since 1966. Consumer prices declined by .2 percent last month from April and, compared to a year ago, core prices (prices excluding the ever-volatile food and energy sectors) have increased by only 0.9 percent.

While this is good news for consumers during a time of high unemployment, it puts an unusually strong squeeze on many companies as they try and cope with rising wholesale and input prices, which push up operating and production costs. With the recent pullback in consumer spending, many companies are reluctant to pass on these price increases to their patrons. The question now becomes what will cause this trend to change.

There are several variables that affect consumer prices. Here are some of the trends that have a strong influence how much we all pay for our daily bread.

International economy of soft goods and technology

Labor costs comprise an average of one-third of the total cost of producing the broad range of consumer products. This is why China, Mexico, and other lower labor cost nations are able to compete on price.

In these nations, overhead and depreciation of plants and equipment are often not included in the final product cost of good and services. In addition, the regulatory costs are lower, or absent altogether.

In a global economy that is struggling with unemployment, labor rates remain extremely competitive. However, averages can be deceiving. For example, China currently has an official 5.1 percent average unemployment rate. This represents approximately 30.1 million people out of work in China which is three times higher than the absolute number in the U.S.

Monetizing the Debts of Nations

One of the tools that the Federal Reserve Bank uses to affect consumer prices is the production of money. This is also used as a method of servicing government debt. According to the U.S. Treasury, the total national debt this year will be $13.6 trillion and forecast to increase to $19.6 trillion by 2015. This sum is more than the entire annual GDP of the nation. The decision to allow for higher inflation rates by increasing the money supply is political; it uses less political capital than attempting to balance budgets with increased taxes or budget cuts.

Consumer demand

Retail sales nationally were down 1.2 percent from April to May of this year. The local Eastside market, in contrast, had modest gains. Based on Hebert Research’s local consumer research, consumer spending is a function of three important variables: the ability to purchase, the willingness to purchase, and a complex set of emotions — fears, worries and satisfying many different consumer wants.

Buying decisions for new technology, soft goods, cars and homes are based on emotion and justified by logic — in other words, the need and the right price. The business community, whether on the Eastside or nationally, has few choices other than adapting to become more competitive.

One of the ways in which Eastside businesses can help mitigate the current margin squeeze is by investing into the research and development of new products. After all, products that provide a unique value to consumers can potentially command a price premium.

Jim Hebert is the president and founder of Hebert Research, Inc., an international real estate, land use, and statistical research firm in Bellevue.