Americans’ refusal to continue paying higher prices could be dealing a final blow to rising inflation in the US

WASHINGTON – The big inflation spike of the last three years is almost over – and economists attribute American consumers for helping to kill him.

Some of the largest companies in the United States, from Amazon to Disney to Yum Brands, say their customers are increasingly looking for cheaper alternative products and services, looking for bargains or simply avoiding products they consider too expensive. Consumers are not cutting back enough to cause an economic recession. Instead, economists say, they appear to be returning to pre-pandemic norms, when most companies felt they couldn’t raise prices much without losing business.

“Even though inflation is low, prices are still high, and I think consumers have gotten to the point where they just won’t accept that,” Tom Barkin, president of the Federal Reserve Bank of Richmond, said last week at a business conference . economists. “And that’s what you want: the solution to high prices is high prices.”

A more price-sensitive consumer helps explain why inflation appeared be constantly falling toward the Federal Reserve’s 2% target, ending a period of painfully high prices that strained many people’s budgets and darkened your perspectives about the economy. It also took center stage in the presidential election, with inflation leading many Americans to sour on the Biden-Harris administration’s handling of the economy.

Consumers’ reluctance to continue paying more has forced companies to slow down their price increases – or even reduce them. The result is a cooling of inflationary pressures.

Other factors also helped control inflation, including the recovery of supply chains, which boosted the availability of cars, trucks, meat and furniture, among other items, and high interest rates engineered by the Fed, which slowed home sales. , automobiles and appliances and other interest rate-sensitive purchases.

Still, a key question now is whether consumers will pull back so much that they put the economy at risk. Consumer spending represents more than two-thirds of economic activity. With the emergence of evidence that the job market is coolinga drop in spending could potentially derail the economy. Such fears caused stock prices will plummet a week ago, although markets have since recovered.

This week, the government will provide updates on inflation and the health of the American consumer. On Wednesday, it will release the consumer price index for July. It is expected to show that prices – excluding volatile food and energy costs – rose just 3.2% from the previous year. This would represent a drop from 3.3% in June and would be the lowest annual inflation figure since April 2021.

And on Thursday, the government will report on last month’s retail sales, which are expected to be up a decent 0.3% from June. Such a gain would suggest that although Americans have become vigilant about their money, they are still willing to spend.

Many companies have noticed.

“We’re seeing lower average selling prices… right now because customers continue to slash prices wherever they can,” said Andrew Jassy, ​​CEO of Amazon.

David Gibbs, CEO of Yum Brands, which owns Taco Bell, KFC and Pizza Hut, told investors that a more cost-conscious consumer has slowed its sales, which fell 1% in the April-June quarter at stores open at least a year. year. .

“Ensuring we offer consumers affordable options,” Gibbs said, “has been an area of ​​increased focus for us over the past year.”

Other companies are cutting prices outright. Dormify, an online retailer that sells dorm supplies, is offering comforters starting at $69down from $99 a year ago.

According to the Fed’s “Beige Book,” an anecdotal collection of business reports from across the country that is released eight times a year, companies in nearly all of the Fed’s 12 districts have described similar experiences.

“Nearly every district cited retailers offering discounts on items or price-sensitive consumers purchasing only essential items, trading in lower quality, purchasing fewer items, or looking for the best deals,” the Beige Book said last month.

Most economists say consumers still spend enough to sustain the economy on a consistent basis. Barkin said most businesses in his district — which covers Virginia, West Virginia, Maryland and North and South Carolina — report that demand remains solid, at least at the right price.

“In my opinion, consumers are still spending, but they are choosing,” Barkin said.

In a speech a few weeks ago, Jared Bernstein, who leads the Biden administration’s Council of Economic Advisers, cited consumer caution as the reason inflation is approaching the end of a “round trip” back. at the Fed’s 2% target level.

Emerging from the pandemic, Bernstein noted, consumers were flush with cash after receiving multiple rounds of stimulus checks and having reduced their spending on in-person services. Its improved finances “gave certain companies the ability to exercise pricing power that was much less prevalent before the pandemic.” After COVID, consumers “were less responsive to price increases,” Bernstein said.

As a result, “the old adage that the cure for high prices is high prices (has) been temporarily abandoned,” Bernstein said.

Thus, some companies increased prices even more than necessary to cover the higher costs of production factors, thus increasing their profits. Limited competition in some sectors, Bernstein added, has made it easier for companies to charge more.

Barkin noted that before the pandemic, inflation remained low as online shopping, which facilitates price comparisons, became increasingly prevalent. Major retailers have also kept costs low and increased oil production in the US has driven down gas prices.

“A price increase was so rare,” Barkin said, “that if someone came to you with a 5% or 10% price increase, you would almost just throw it away, like, ‘How could you do that?’ ”

This changed in 2021.

“There is a labor shortage, Barkin said. “Shortages in the supply chain. And price increases come to you from everywhere. Your gardener is raising his prices and you have no ability to do anything other than accept them.”

Economist Isabella Weber of the University of Massachusetts, Amherst, dubbed this phenomenon “sellers’ inflation” in 2023. In an influential papershe wrote that “publicly reported supply chain bottlenecks” can “create legitimacy for price increases” and “create acceptance by consumers to pay higher prices.”

Consumers aren’t as accepting anymore, Barkin said.

“People have a little more time to stop and say, ‘How do I feel about paying $9.89 for a 12-pack of Diet Coke when I used to pay $5.99?’ They don’t like it very much and that’s why people are making choices.”

Barkin said he expects this trend to continue to slow price increases and reduce inflation.

“I’m actually quite optimistic that over the next few months we’ll see good readings on the inflation side,” he said. “All elements of inflation appear to be stabilizing.”