Inflation cools but prices of many items will remain high

Inflation cools, but prices of many items will remain high for months

A grocery store in New York.

Wang Ying | Xinhua News Agency | Getty Images

Inflation can cool down. But for most Americans, the price of a cup of coffee or a bag of groceries hasn’t changed.

In the coming months, the big question is whether consumers will feel relief too.

In recent months, many of the key factors driving inflation to a four-decade high have begun to fade. Shipping costs have gone down. Cotton, beef and other raw materials have become cheaper. And shoppers found bigger discounts online and in malls during the holiday season as retailers scramble to shed excess inventory. Consumer prices fell 0.1% mom in December, according to the Labor Department. It was the largest monthly decline in nearly three years.

But cheaper freight and raw material costs won’t trickle down to consumers immediately, in part because of supplier contracts that set prices months in advance.

The prices are still well above those of a year ago. The consumer price index, which measures the cost of a variety of goods and services, rose 6.5% in December, according to data from the Labor Department. Some price increases are startling: the cost of large, A-grade eggs has more than doubled, while prices for cereal and baked goods have risen 16.1%.

“There are some prices, some commodities, for which prices are falling,” said Mark Zandi, chief economist at Moody’s Analytics. “But on the whole, prices are not falling. It’s just that the rate of increase is slowing down.”

Retailers, restaurants, airlines, and other businesses choose whether to pass on price cuts or impress investors with improved profit margins. Consumers are becoming increasingly selective when it comes to spending. And economists are weighing whether the US will enter a recession this year.

Sticky contracts, higher wages

In the early days of the Covid pandemic, Americans splurged while factories and ports were temporarily shut down. Container clogged ports. Shops and warehouses struggled with out-of-stock items.

This surge in demand and limited supply contributed to higher prices.

Now these factors are beginning to reverse. As Americans feel inflation and spend on other priorities like commuting, traveling, and eating out, they’ve bought fewer things.

Freight and container costs have fallen, which has lowered prices along the rest of the supply chain. According to Labor Department data, the cost of a long-haul truck load rose 4% in December compared to the same period last year, but fell nearly 8% from a record high in March.

The cost of a 40-foot shipping container has fallen 80% from its peak of $10,377 in September 2021 to $2,079 in mid-January, according to the World Container Index by Drewry, a supply chain consultancy. But it’s still higher than before the pandemic.

Food and clothing have become cheaper. Wholesale beef prices fell 15.6% in November from a year earlier, but are still at historically high levels, according to the US Department of Agriculture. Coffee beans fell 19.7% over the same period, according to the International Coffee Organization’s composite global price. The cost of raw cotton fell 23.8%, according to Labor Department data.

However, to guard against unpredictable price spikes, many companies have long-term contracts that set months in advance the prices they pay to operate their businesses, from buying ingredients to shipping goods around the world.

For example, Chuy’s Tex Mex has priced fajita beef lower than what the chain paid last year and plans to price ground beef in the third quarter as well. But guests are still likely to pay higher menu prices than last year.

Chuy’s plans to raise prices by about 3% to 3.5% in February, although no further price increases are planned for later this year due to its conservative pricing strategy. The chain’s prices are up about 7% from the same period last year, lagging price increases across the restaurant industry as a whole.

Likewise, coffee drinkers are unlikely to see their latte and cold brew prices drop this year. Dutch Bros. Coffee CEO Joth Ricci told CNBC that most coffee companies hedge their prices six to 12 months in advance. He predicts that coffee chain prices could stabilize as early as mid-2023 and not until late 2024.

Supplier contracts are not the only reason for fixed prices. Labor has become more expensive for companies that need large numbers of workers but are struggling to find them. Restaurants, nail salons, hotels and doctor’s offices will continue to face the cost of higher wages, Moody’s Zandi said.

A shortage of airline pilots is among the factors likely to keep airfares more expensive this year. Airline ticket prices have fallen in recent months but are still up almost 30% year over year, according to the latest federal data.

However, Zandi said if the job market stays strong, inflation eases and wages rise, Americans will be better able to handle higher prices on airline tickets and other items.

According to the Bureau of Labor Statistics, annual hourly wages rose 4.6% last year — not as sharply as December’s CPI growth.

However, falling demand has translated into price reductions in some categories. Several pandemic hot items, including televisions, computers, sporting goods and major appliances, have fallen in price, according to data from the Labor Department in December.

Budget pressures for families

Retail executives anticipate that families’ budgets will remain under pressure in the coming year.

At least two grocery executives, Kroger CEO Rodney McMullen and Sprouts Farmers Market CEO Jack Sinclair, said they don’t expect grocery prices to drop anytime soon.

“The surge is starting to level off a bit,” McMullen said. “That doesn’t mean you’re going to start seeing deflation. We would expect inflation in the first half of the year. The second half of the year would be significantly lower.”

He said there are some exceptions. Eggs, for example, are likely to become cheaper as the bird flu outbreak recedes.

Over the past two years, consumer goods companies have increased the price of items on Kroger’s shelves or reduced the package size, a strategy known as “shrinkflation.” McMullen said no one has returned to the grocer to lower prices or increase discount levels from a year ago. Some are maintaining aggressive pricing as they catch up after margins were squeezed earlier in the pandemic or because they are sacrificing volume for profit, he said.

At Procter & Gamble, for example, executives plan to raise prices again in February. Prices of P&G consumer products like Pampers diapers and Bounty paper towels are up 10% year over year, while demand fell 6% in the most recent quarter.

In other cases, companies are still struggling with factors that contributed to inflation. For example, farmers are raising cows but have fewer than before the pandemic, and grain and corn are less plentiful as the war in Ukraine continues, according to McMullen.

“If you previously spent $80 and are now spending $90 [on groceries]I think you’re going to spend $90 for a while,” he said. “I don’t think it’s going to go back to $80.”

Dylan Lissette, CEO of Utz Brands, echoed this sentiment back in August, telling investors that list prices don’t typically fall even when costs fall.

“We don’t take something that was $1, move it to $1.10, and then a year or two later to $1,” he said.

Instead, food companies like Utz typically offer customers steeper and more frequent discounts when costs come down, according to Lissette, who was once responsible for pricing Utz’s pretzels and kettle chips.

In the next few years, companies could reverse the “shrinkflation” packaging changes that are leading to cheaper-per-ounce snacks. And two or three years later, shoppers could see the launch of new value pack sizes, Lissette said.

The ace up the retailer’s sleeve

However, retailers may be able to accelerate this schedule. They can use their own lower-priced private labels, such as peanut butter, cereal, and laundry detergent, which are similar to well-known national brands.

Kroger last fall introduced Smart Way, a new private label with more than 100 items including loaves of bread, canned vegetables and other staples at the lowest price.

McMullen said the grocer had already planned to launch its own brand but had sped up its debut by about six to nine months because shoppers are interested in value amid inflation. And he added, if a national brand loses market share, they’re more likely to aggressively respond to discounts — or even drop the price permanently.

Zandi, an economist at Moody’s, said customers are frustrated but not powerless. By choosing competing brands or opting for promotional items, they can send a message.

“Companies are responsive to buyers,” he said. “If consumers are price conscious and price sensitive, that will do a lot to persuade business people to stop raising prices and maybe even offer a discount.”

— CNBC’s Leslie Josephs contributed to this story.