Washington-
Inflation has changed the way many Americans shop. Now these changing consumer habits are helping to reduce inflation.
Consumers are fed up with prices, which are still on average around 19% higher than pre-pandemic levels, and are fighting back. At grocery stores, they are switching from branded items to private label items, switching to discount stores, or simply buying fewer items like snacks or gourmet foods.
More Americans are also buying used cars instead of new ones, forcing some dealers to start offering discounts on new cars again. But growing consumer resistance to what critics call price gouging is most evident in food, as well as consumer goods like paper towels and napkins.
Consumer resistance in recent months has led major food companies to respond by significantly slowing their price increases from the highs of the last three years. That doesn't mean food prices will fall back to levels of a few years ago, although prices for some items, including eggs, apples and milk, are below their peaks. But the milder rise in food prices is likely to help further cool overall inflation, which has fallen sharply to 3.1% from a peak of 9.1% in 2022.
SEE ALSO: US inflation slows as price pressures begin to ease
Public frustration over prices has become a central issue in President Joe Biden's re-election bid. Surveys show that despite the dramatic decline in inflation, many consumers are dissatisfied that prices are still so much higher than before inflation began accelerating in 2021.
Biden has echoed criticism from many left-leaning economists that companies raised prices more than was necessary to cover their own higher costs, thereby boosting their profits. The White House has also attacked “shrinkflation,” in which a company, instead of increasing the price of a product, instead shrinks the quantity in the package. In a video released on Super Bowl Sunday, Biden called shrinkflation a “rip-off.”
For many economists, consumer resistance to high prices suggests that inflation is likely to continue to ease. That would make this burst of inflation quite different from the debilitating price spikes of the 1970s and early 1980s, which took longer to overcome. When high inflation persists, consumers often develop an inflationary psychology: ever-rising prices cause them to speed up their purchases before costs rise further, a trend that in turn can perpetuate inflation.
“That was the fear — that everyone would tolerate higher prices,” said Gregory Daco, chief economist at EY, a consulting firm, who notes that didn’t happen. “I don’t think we’ve entered a hyperinflationary regime.”
Stuart Dryden leaves a grocery store in Arlington, Virginia on February 21, 2024.
Instead, this time many consumers responded like Stuart Dryden, a commercial underwriter at a bank who lives in Arlington, Virginia. During a recent visit to his regular grocery store, Dryden, 37, pointed out large price differences between Kraft Heinz-branded products and the store-brand competitors he now prefers.
Dryden, for example, loves cream cheese and bagels. A 12-ounce can of Kraft's Philadelphia cream cheese costs $6.69. He noted that the store brand costs just $3.19.
A 24-pack of individual Kraft cheese slices costs $7.69; the store label, $2.99. And a 32-ounce Heinz ketchup bottle costs $6.29, while the alternative costs just $1.69. Similar gaps existed for mac and cheese and shredded cheese products.
“Just those five products combined are already close to $30,” Dryden said. He calculated that the alternatives were less than half that, at about $13.
“I've tried private label options and the quality is the same and it's almost a no-brainer to switch from the products I used to buy a ton to just private label,” Dryden said.
Alex Abraham, a spokesman for Kraft Heinz, said costs rose 3% in the final three months of last year, but the company only increased its own prices by 1%.
“We are doing everything we can to achieve efficiencies in our factories and other parts of our business to offset and mitigate further price increases,” Abraham said.
Last week, Kraft Heinz said sales fell in the final three months of last year as more consumers switched to cheaper brands.
Dryden has taken other steps to save money: A year ago, he moved into a new apartment after his previous landlord increased his rent by about 50%. His previous apartment was next to a relatively expensive grocery store, Whole Foods. Now he shops at Amazon Fresh nearby and visits the discount grocery store Aldi every few weeks.
Samuel Rines, investment strategist at Corbu, says PepsiCo, Kimberly-Clark, Procter & Gamble and many other consumer and packaged goods companies have taken advantage of increases in input costs due to supply chain disruptions and Russia's invasion of Ukraine to dramatically increase their prices prices – and increase their profits – in 2021 and 2022.
One contributing factor was that millions of Americans saw solid wage gains and received stimulus checks and other government aid, making it easier for them to pay the higher prices.
Still, some referred to the phenomenon as “greed inflation.” And in a March 2023 research report, economist Isabella Weber of the University of Massachusetts, Amherst, called it “seller inflation.”
But late last year, many of these companies realized the strategy was no longer working. Most consumers have long since spent the savings they accumulated during the pandemic.
Low-income consumers in particular are racking up credit card debt and falling behind on their payments. Overall, Americans are spending more cautiously. Daco points out that overall sales rose just 4% during the holiday shopping season — and most of that was due to higher prices rather than consumers actually buying more things.
As an example, Rines points to Unilever, which makes Hellman's mayonnaise, Ben & Jerry's ice cream and Dove soaps, among other things. Unilever increased its prices by an average of 13.3% across all brands in 2022. Sales volume fell 3.6% this year. In response, it raised prices by just 2.8% last year; Sales rose by 1.8%.
“We notice that the consumer is no longer willing to accept the higher prices,” said Rines. “So companies started to become a little more skeptical about their ability to make price alone the driver of their sales. They had to get those quantities back and the consumer wasn’t responding in a way that they were happy with.”
Unilever itself recently attributed the poor sales performance in Europe to “losses of share by private labels”.
Other companies have also noticed. After their sales fell in the final three months of last year, PepsiCo executives signaled they would rein in price increases this year and focus more on growing sales.
“In 2024 we see … a normalization of costs, a normalization of inflation,” said CEO Ramon Laguarta. “So we’re seeing everything refocus on our long-term price trends.”
Jeffrey Harmening, CEO of General Mills, which makes Cheerios, Chex Cereal, Progresso soups and dozens of other brands, has admitted that his customers are increasingly looking for bargains.
And McDonald's executives said consumers with incomes under $45,000 are visiting less and spending less when they visit, and said the company plans to emphasize its lower-priced items.
“Consumers are more cautious – and more fatigued – when it comes to pricing, and we will continue to be consumer-driven in our pricing decisions,” Ian Borden, the company’s chief financial officer, told investors.
Officials at the Federal Reserve, the country's main inflation-fighting institution, have cited consumers' growing reluctance to pay high prices as a key reason they expect inflation to fall steadily toward its annual 2% target.
“Companies are telling us that price sensitivity is much higher now,” Mary Daly, president of the Federal Reserve Bank of San Francisco and a member of the Fed's interest rate committee, said last week. “Consumers don’t want to buy unless they see a 10% discount. … This is a serious improvement in the role consumers play in containing inflation.”
Surveys by the Fed's regional banks have shown that companies in all industries expect lower price increases this year. According to the New York Fed, companies in their region plan to raise prices by an average of about 3% this year, up from about 5% in 2023 and even 7% to 9% in 2022.
Such trends suggest that companies were well on their way to slowing their price increases before Biden's recent attacks on price gouging.
Claudia Sahm, founder of SAHM Consulting and former Fed economist, said: “Consumers are more powerful than President Biden.”