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COST OF FUN TAKES LEAP

As costs rise, expect toy prices to jump up to 10 percent this year.

Next holiday, that toy that was supposed to talk for a minute will talk for 40 seconds, and that portable electronic quiz game will ask fewer questions.

The nation's toy makers - faced with soaring energy and raw material prices and rising labor costs in China - are tweaking new product lines and scaling back their offerings.

Parents will have to do more work too - they'll be spending more time downloading content online into high-tech toys as companies like iToys Inc. focus on creating online material instead of using a bigger, more costly memory chip.

Despite those changes, consumers could face anywhere from a 5 to 10 percent price increase on many toys this year, says Eric Johnson, professor of operations management at Dartmouth's Tuck School of Business. That ends a decade of deflation at a time when the U.S. economy may be heading into a recession.

"You are going to see more $7.99 toys at the bottom instead of $2.99," said Michael Greenberg, the former CEO of toy maker Shelcore Inc. and now a toy industry consultant.

The topic is expected to be a hot issue at the industry's annual trade expo American International Toy Fair, which starts on Sunday and features holiday 2008 products.

Kathleen Waugh of Toys "R" Us Inc., the nation's second-largest toy seller behind Wal-Mart Stores Inc. acknowledged that consumers will see price increases in single-digit percentages across the board starting this summer. She declined to be more specific while the chain works out details with its manufacturers.

Melissa O'Brien of Wal-Mart declined to comment specifically on price increases, but said the retailer will work with suppliers to maintain affordable prices.

The falling U.S. dollar against the Chinese yuan, higher energy costs and a new business code in China are forcing Chinese factories to raise prices for exports. The U.S. toy industry, which imports about 80 percent of its products from there, is among the hardest hit. Toys are mostly made of plastic and are under increased regulatory scrutiny after last year's highly publicized recalls because of lead and other hazards.

Still, the average toy price - about $7 - remains relatively cheap because the bulk of toys sold involve card games and miniature cars - impulse purchases that can be picked up at the local supermarket. And makers argue that toys should still be a good value since prices have been falling for years - down 4.7 percent last year from the previous year, according to the Consumer Price Index.

But any price hikes could further squeeze consumers, who are paying more for food and gasoline, or manufacturers, who can only absorb so much without hurting profit margins.

"This is not a good thing for consumers," said Sean McGowan, a Needham & Co. analyst. "The deflation days may be over."

Yolande Sprague, a stay-at-home mom from Rochester, N.H. typically spends about $100 a month on toys for her two sons, Eddie, 3, and Isaiah, 1, but she said she will probably cut back to somewhere between $50 to $80. She is careful about buying toys, considering their resale value on auction site eBay before buying because of the slowing economy.

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