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Will Anger Over Inflation Soon Subside?
Inflation has come down sharply over the past year, but consumers remain grumpy because prices on many items, particularly in the food category, haven’t returned to pre-pandemic levels and may never.
On Thursday, Oct. 12, the U.S. Bureau of Labor Statistics reported that U.S. inflation leveled off to 3.7% in September compared to a year ago, down sharply from a 9.1% recent peak in June 2022.
Yet The Conference Board’s survey showed that U.S. consumer confidence fell to a four-month low in September. Dana Peterson, chief economist at The Conference Board, said, “Consumers continued to be preoccupied with rising prices in general, and for groceries and gasoline in particular. Consumers also expressed concerns about the political situation and higher interest rates.”
Inflation still remains above the Fed’s target rate of 2% and comes as Americans had enjoyed roughly a decade of low inflation leading up to the pandemic.
Economist Elizabeth Crofoot told CNBC that consumers are constantly reminded of the higher cost of living when they grocery shop or eat out and see fewer perks, such as free drinks for kids. She said, “It’s the combination of inflation and shrinkflation. As a consumer, you feel like you’re being nickeled and dimed at every turn.”
The job outlook remains healthy, with the Labor Department reporting on Oct. 6 that the U.S. economy added a stunning 336,000 jobs in September, with the unemployment rate remaining below 4%. Yet wages have been lagging behind inflation until recently.
Julia Pollak, chief economist at ZipRecruiter, explained to CNBC that wages from 2013 to 2019 grew faster than inflation, on average, but have only grown about as fast as inflation, on average, since the pandemic. Pollak said, “Workers have not seen their purchasing power expand each year. They’re just kind of treading water.”
The USDA in its September forecast predicted that U.S. food-at-home prices would finally moderate in 2024, with an expected 1.6% increase. For the current year, food-at-home prices are expected to climb 5.1%, following appreciation over the pandemic of 11.4% in 2022 and 3.5% in both 2021 and 2020.
However, continued labor market tightness is expected to add inflationary risks going forward.
A study from RBC Capital Markets concluded that while food prices are finally stabilizing as supply chain bottlenecks, shipping costs, and volatile prices of raw food commodities in part tied to the Ukraine war ease, food prices aren’t going back to pre-pandemic levels as the costs related to labor and climate change are passed on to consumers.
“As more people enter retirement and fewer enter the labor force (in the food sector) labor shortages will persist long-term,” Nathan Janzen, assistant chief economist at RBC, told the Toronto Star. “And extreme weather events will limit crop production putting more pressure on our supply.”
Speaking to the Wall Street Journal, Joe Brusuelas, chief economist at RSM, said economists typically don’t view deflation or outright declines in prices as productive for an economy. Still, he added, consumers are “angry that the price level has reset higher on a permanent basis” for many items.
Discussion Questions
Will prices have to come down to pre-pandemic levels, or will U.S. consumers grudgingly adapt to paying higher prices for food and other essential items? What should inflation shocks in the past have taught retailers about making adjustments during inflation-cooling periods?
Poll
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Jenn McMillen
Chief Accelerant at Incendio & Forbes Contributing Writer
Dick Seesel
Principal, Retailing In Focus LLC
Last time I looked, the U.S. economy was based on free markets and the eternal soundbite is that the markets dictate what happens in a free-market society. See ya in six months and we’ll talk again.
Consumers are definitely more sensitive to the prices that they see every day, and even if you’re not buying gas every day, you’re driving past public signs advertising gas prices every day. And at least for me, they seem to be fluctuating wildly in the last couple of months. That definitely creates concern and even a sense of uncertainty that certainly doesn’t help consumer confidence.
But I think the consumer is more sophisticated than that. I think most of them know that prices aren’t ever going to return to pre-pandemic levels. And frankly, no one should want that, because it would be a prolonged period of DEflation and that’s bad for everyone. What gets people riled up is when statements like Pepsi’s recent results filter into the consumer consciousness. Raising prices beyond inflation, recording record profits, and then not passing some of those profits down to boosted pay for front line workers: that is a recipe for major brand dissatisfaction, and brands need to be a lot more careful about those optics. What happens on Wall Street doesn’t stay on Wall Street, not in today’s age of social media and stoked outrage.
Compared to 2019, prices are up 19.9%. Food prices are up 24.6%. Average household income growth over the 2019 to 2023 period is running at just 11.7%. So, of course shoppers are a little grumpy. The problem is that there are very few ways to escape inflation, people just have to suck it up.
Excellent point Neil! If wages were rising at the same rate, consumers wouldn’t be as sensitive. Consumers at lower wage rates and those on fixed income continue to feel high prices squeezing their discretionary budgets. Prices won’t come down for most products, with the exception of fuel, which historically fluctuates wildly. Therefore, the impact of the high inflation during the past two years will continue to hurt customers until wages start outpacing inflation.
Agree, David. I think grocery prices may come down a bit due to competition. But the idea prices are going back to where they were is a non-starter. We need wages to catch up and for things to reach a new level.
Short answer- Consumers will remain angry. For many retailers, this is an opportunity to really grow their private label businesses. Many of the drivers of inflation from two years ago- supply chain bottlenecks, and volatile demand, have been mitigated, and yet prices are still high. Especially for branded products. In the meantime, the P&L Sheets for many companies are better than ever. This suggests a disconnect in the market somewhere. (no comment) If grocers and others can create compelling products, priced right and sized right, there is a really strong opportunity to take market share from brands.
Inflation will push more consumers to reluctantly adapt their habits to high prices. Consumers will buy less, cook at home, and visit more dollar and discount stores for deals and private labels.
Past inflation shocks have taught retailers to stay attuned to consumer needs and expectations. Inflation may cool down but consumers still expect value and quality.
The year-over-year inflation rate may have subsided, but the reality is that prices are higher than in 2019. (In particular, there was a big slump in gas prices in the immediate wake of the pandemic.) Even as gas prices start to decline — I paid 2.94/gallon yesterday — there are still high costs associated with grocery shopping and mortgage borrowing.
Consumers may be grumpy, but consumer spending is still fairly robust. The winners will be retailers and brands offering the best value right now.
According to CNBC, several things have actually gone down in cost, including electronics, airfares and gasoline (vs 2022 prices). Since electronic purchases and airfare aren’t routine purchases for many, expect consumer ire to continue. American consumers were spoiled with pre-pandemic prices on many items but didn’t acknowledge it. If wages were keeping pace, it wouldn’t hurt as much, but here we are.
Prices don’t come down to their original levels, ever. I think inflation hits everyone a bit differently, with the exception of food being the common denominator. Have a 30 year mortgage – interest rates are something you read about but don’t experience. Not shopping for a car – new/used car price escalation is a newspaper article. But everyone remembers peak pricing, like $10.00 eggs. Perception is reality. I think retailers and manufacturers already knew what to do, raise prices as much as possible as infrequently as possible, and on the downside slowly and minimally.
Not likely that prices will move back to pre-pandemic levels. And food shoppers have taken a number of strategic actions to try to cope with food price inflation, many of which may become more permanent. This is the time for retailers to really focus on private label and maximize the value and quality versus national brands.
Persistent labor shortages, climate change impacts, and ongoing supply chain challenges suggest sustained higher costs. These factors, coupled with economic realities, point towards a lasting shift in pricing dynamics.
When inflation gets high, retailers should work on adaptive strategies during inflation-cooling phases, emphasizing supply chain efficiency, judicious cost control, and nuanced pricing mechanisms to navigate economic changes skillfully.
I don’t expect food prices to come down to pre-pandemic levels. Defenders of high prices will hide behind supply chain issues, which may be true to an extent. Grocers would be wise to heavily promote their store brands as an alternative to pricey name brands. If private labels capture enough sales, brands will be forced to lower prices.
So reduced inflation isn’t the same as deflation: by Jove I think he’s got it! (Not to pick on Tom specifically, but this has been a pet peeve of mine for some time).
To answer the question, we have to ask why (on earth!) we think it might happen? I think it’s beause food prices are volatile and frequently cyclical (particularly perishables). Also, one of the main explanations – excuses? – was “supply chain issues”, which were presumably of short duration. Some of thes things were true, and prices did indeed fall…seen any $8/head lettuce lately? But realistically, is the whole price structure going to return to 2019?? Of course not! No more than 2019 was going to become 2009 or 1999…or 1899.
The economy is an issue. And it always will be. Even in a good economy, prices go up. During some economies, prices seem to stabilize, but wait long enough, and they will go up. This is a conversation – or a complaint – that we’ve had since the beginning of retail, and we’ll continue to have long after we’re all gone.
Although inflation is beginning to level off, it’s unlikely that we’ll see rates drop to pre-pandemic levels any time soon.
Though there’s a lot of frustration about this amongst consumers, especially the joint experience of inflation and shrinkflation Crofoot mentioned, consumers have already grudgingly adapted to paying higher prices. Because the areas where they’re feeling the financial stress the most – essential purchases like groceries, fuel and utilities for example – cannot be cut out and do not have any cheaper alternatives.
What brands need to be mindful about is how publicly they tout their revenue numbers during these times. While most consumers understand that inflation is here to stay to some degree and have adjusted their spending habits as best as possible, they don’t want to see that companies are achieving record profits while they scrimp and save. Instead, brands need to be clear in their customer communication about what prices are changing, which package sizes are changing and why. It’s a lot easier for consumers to bear the brunt of these changes when they understand the business decisions behind the scenes.