WASHINGTON (AP) — The inflation surge of the past three years is all but over, economists say. American Consumers Thanks for helping me kill it.
Some of the biggest U.S. companies, including Amazon, Disney and Yum Brands, say customers are seeking cheaper alternative products and services, looking for bargains or simply avoiding items they perceive as too expensive. Consumers aren’t thrifting enough to cause a recession. Instead, they appear to be returning to pre-pandemic norms, when most companies felt they couldn’t raise prices significantly without losing business, economists say.
“Inflation is coming down, but prices are still high, and I think we’re getting to a point where consumers can’t accept that,” Federal Reserve Bank of Richmond President Tom Barkin said at a conference of business economists last week. “And that’s what you want: The solution to high prices is higher prices.”
The rise in price-sensitive consumers helps explain why inflation has occurred. It’s falling steadily Rising toward the Federal Reserve’s 2% target, ending an era of painfully high prices that strained the budgets of many, darkened their outlook Impact on the economy: Inflation has been front and center in the presidential election, leaving many Americans unhappy with the Biden-Harris administration’s handling of the economy.
Consumers’ reluctance to pay more forced companies to delay and in some cases reverse price increases, easing inflationary pressures.
On Monday, the Federal Reserve Bank of New York Reported Americans’ expectations about how much they’ll spend over the next 12 months have fallen, and so have inflation outlooks: According to a survey by the New York Fed, consumers expect their spending to increase 4.9% over the next year, the lowest since April 2021, when inflation began to spike.
Consumers also expect inflation to average 2.3% over the next three years, the lowest since the survey began in 2013. Consumer expectations about inflation can be self-fulfilling: Households expecting low inflation tend to delay some purchases in the hope that prices will not rise much in the near future, and may even fall. This tendency can keep price pressures low.
Other factors also helped keep inflation in check, including improved supply chains that have increased supplies of cars, trucks, meat and furniture, and high interest rates set by the Fed that have slowed sales of homes, cars, appliances and other rate-sensitive goods.
Still, the key question now is whether shoppers will cut back on their purchases enough to put the economy, which accounts for more than two-thirds of economic activity, at risk. The job market is coolingThe decline in spending could hurt the economy. Stock prices plummet The market has since recovered after falling a week ago.
This week, the government will provide updates on both inflation and the health of the U.S. consumer. On Wednesday, the Consumer Price Index will be released for July. Prices, which exclude volatile food and energy costs, are expected to rise just 3.2% from a year ago. That would be down from 3.3% in June and the lowest year-over-year inflation rate since April 2021.
And on Thursday, the government will release retail sales figures for last month, which are expected to have risen 0.3% from June. Such an increase suggests that while Americans are becoming more cautious with their money, they are still willing to spend.
Many companies are taking notice.
“Average selling prices are declining today as customers continue to shop at the lowest prices possible,” Amazon CEO Andrew Jassy said.
David Gibbs, CEO of Yum Brands, which owns Taco Bell, KFC and Pizza Hut, told investors that sales at stores open at least a year fell 1% in the April-June period as consumers became more cost-conscious.
“Providing affordable options for consumers is something we’ve become more focused on since last year,” Gibbs said.
Other companies are also slashing prices. Dormify, an online retailer that sells dorm supplies, Duvets starting at $69That’s down from $99 a year ago.
Companies in nearly all 12 regions described similar experiences, according to the Beige Book, a collection of anecdotes from business reports across the nation released eight times a year by the Federal Reserve.
“Nearly every district reported that retailers were discounting products and that price-sensitive consumers were buying only essentials, cutting back on quality, buying less, and shopping around for the best deals,” the Beige Book said. I said last month.
Most economists say consumers are still spending enough to keep the economy stable. Barkin said most businesses in his jurisdiction, which includes Virginia, West Virginia, Maryland, North Carolina and South Carolina, are reporting strong demand, at least at fair prices.
“The way I put it, consumers are still spending, but they’re making choices,” Barkin said.
Jared Bernstein, who heads the Biden administration’s Council of Economic Advisers, in a speech a few weeks ago cited consumer caution as the reason inflation is nearing the end of a “round trip” to the Fed’s 2% target level.
Bernstein noted that consumers are coming out of the pandemic flush with cash after multiple rounds of stimulus checks and cuts to spending on in-person services. Improved financial positions “allow some companies to exercise pricing power they didn’t see much of before the pandemic.” Bernstein said that post-COVID, consumers “are less responsive to price increases.”
As a result, “the old adage that the solution to high prices is high prices has been temporarily invalidated,” Bernstein said.
That has led some companies to raise prices more than necessary to make up for rising input costs, boosting profits, Bernstein said, adding that limited competition in some industries makes it easier for companies to raise prices.
Barkin noted that before the pandemic, inflation had remained low as online shopping made it easier to compare prices, major retailers kept costs down, and rising U.S. oil production drove down gasoline prices.
“Price increases were very rare,” Barkin said. “If someone offered to raise prices by 5 or 10 percent, we’d say, ‘How can you do that?’ and pretty much kick them out.”
That has changed in 2021.
“There’s a labor shortage,” Barkin says, “a supply chain shortage. And then price increases come down on you from all sides. Your gardeners are raising prices, and you can’t afford to do anything but accept it.”
Isabella Weber, an economist at the University of Massachusetts, Amherst, describes this phenomenon as “Seller’s inflation” In 2023. Influential paperShe wrote that “publicized supply chain bottlenecks” could “create the justification for price increases” and “create consumer acceptance of paying higher prices.”
Consumers just aren’t as receptive anymore, Barkin said.
“People have more time to pause and think, ‘I used to buy a 12-pack of Diet Coke for $5.99, but now I’m buying it for $9.89.’ People don’t like it as much, so they’re having to make a choice.”
Barkin said he expects this trend to continue to slow price increases and keep inflation at bay.
“I’m actually pretty optimistic that we’re going to see some good numbers on the inflation front over the next few months,” he said. “All the elements of inflation seem to be calming down.”
