IS the US cigarette industry going up in smoke, and why should we care?

Morningstar, a stock and fund analysis firm, believes that the US cigarette industry is in for hard times. Altria has been one of the best performing stocks in the past. Nicotine is probably the most addictive substance we know of. In the past, even when price was increased, consumers did not significantly curtail their smoking habits - in economics terms, demand for cigarettes was inflexible. Demand for gas in the US is another example.

However, consumers have limits. The economy is, as they say, going south. People in the West are smoking less. And the Federal government, as well as state and local governments, have viewed tobacco taxes as a bit of a horn of plenty. The recent expansion to SCHIP was to have been funded by increased tobacco taxes. We are starting to reach the point where the prices are so onerous that they are having an effect on consumer behavior. It's as if gas were $8 a gallon, instead of $4.

As a result, Morningstar feels that US tobacco companies have significantly diminished prospects going forward. Now, Altria split its international division, Philip Morris International, off, and its sales in emerging markets are unfortunately increasing. However, while Americans will still smoke, they will smoke less.

It's a good thing that people are smoking less. However, this article has implications for legislators who want to fund their programs with tobacco taxes: in the future, it isn't going to work so well. I'm not exactly sad for the tobacco industry, though.