Americans’ refusal to keep paying higher prices may be dealing a final blow to US inflation spike

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WASHINGTON (AP) — The past three years of high inflation are coming to an end — and economists say American consumers have helped put a damper on it.

Some of America’s largest companies, from Amazon to Disney to Yum Brands, say their customers are increasingly looking for cheaper alternative products and services, hunting for deals or simply avoiding items they consider too expensive. And consumers aren’t cutting back enough to cause an economic slowdown. 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.

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“While inflation has come down, prices are still high, and I think consumers have reached the point where they can no longer accept that,” Richmond Fed President Tom Barkin told a conference of business economists last week. “That’s what we want: the solution to high prices is higher prices.”

The more price-sensitive consumer helps explain why inflation has been steadily falling toward the Fed’s 2% target, ending a period of painfully high prices that strained many people’s budgets and clouded their outlook for the economy. It has also taken center stage in the presidential election, with inflation prompting many Americans to grow disenchanted with the Biden-Harris administration’s handling of the economy.

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

Other factors have also helped tame inflation, including healing supply chains, which have boosted the availability of cars, trucks, meat and furniture, among other goods, and higher interest rates engineered by the Federal Reserve, which have slowed sales of homes, cars, appliances and other interest-rate-sensitive purchases.

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But the key question now is whether shoppers will pull back enough to put the economy at risk. Consumer spending accounts for more than two-thirds of economic activity. With evidence of a slowing labor market, a drop in spending could derail the economy. Such concerns sent stocks tumbling a week ago, though markets have since rebounded.

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 a year earlier. That would be down from 3.3% in June and would be the lowest year-over-year inflation figure since April 2021.

On Thursday, the government will report retail sales for last month, which are expected to have risen 0.3% from June. That increase suggests that Americans, while careful with their money, are still willing to spend.

Many companies have noticed this.

“We are seeing a decline in average selling prices … right now because customers continue to cut prices when they can,” said Andrew Jassy, ​​Amazon’s CEO.

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

“Ensuring affordable options are available to consumers has been an area of ​​greater focus for us since last year,” Gibbs said.

Other companies are cutting prices directly. Dormify, an online college dorm supplies retailer, is offering bed sheets starting at $69, down from $99 a year ago.

According to the Federal Reserve’s “Beige Book,” a collection of business reports from around the country that is published eight times a year, companies in nearly all 12 Federal Reserve districts described similar experiences.

“Nearly every region reported that retailers were offering discounts on goods or that price-sensitive consumers were buying only essentials, trading up on quality, buying fewer items or shopping around for the best deals,” the Beige Book reported last month.

Most economists say consumers are still spending enough to sustain the economy on a steady basis. Barkin said most businesses in his region — which covers Virginia, West Virginia, Maryland, and the Carolinas — report that demand remains strong, at least at the right price.

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“The way I like to put it is that consumers are still spending, but they are choosing,” Barkin said.

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

Consumers are flush with cash after receiving several rounds of stimulus checks and have cut back on spending on personal services, Bernstein noted. Their improved financial situation “has given some companies the ability to manipulate pricing power that was less prevalent before the pandemic,” he added. Post-COVID, consumers are “less responsive to price increases.”

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

As a result, some companies raised their prices beyond what was needed to cover higher input costs, boosting their profits. Bernstein added that limited competition in some industries made it easier for companies to charge higher prices.

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Barkin noted that inflation rates had been low before the pandemic, as online shopping, which makes it easier to compare prices, became more widespread, major retailers cut costs, and increased U.S. oil production led to lower gas prices.

“Price increases were so rare that if someone came to you with a 5% or 10% price increase, you would almost throw them out, like, ‘How could you do that?’” Parkin said.

That changed in 2021.

“There’s a labor shortage, there’s a supply chain shortage, and price increases are coming at you from everywhere,” Parkin said. “The gardener raises your prices, and you don’t have the ability to do anything but accept them.”

Economist Isabella Weber of the University of Massachusetts at Amherst dubbed this phenomenon “vendor inflation” in 2023. In an influential paper, she wrote that “publicly reported supply chain bottlenecks” can “create legitimacy for higher prices” and “create consumer acceptance of paying higher prices.”

Consumers are no longer receptive to this, Parkin said.

“People have more time to stop and ask, ‘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 that much, so people make their own decisions.”

Barkin said he expects this trend to continue, slowing price increases and calming inflation.

“I am very optimistic that we will see good readings on inflation over the next few months. It seems that all the elements of inflation are starting to stabilize,” he said.

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