Inflation is slowing, but high prices will persist

A grocery store in New York.

Wang Yin | Xinhua News Agency | Getty Images

Inflation may cool. But, for most Americans, the price of a cup of coffee or a bag of groceries has not budged.

In the coming months, the big question is whether consumers will also begin to feel relief.

investment related news

Goldman's Small Caps for Lower Inflation

CNBC Pro

In recent months, many of the key factors that fueled a four-decade peak in inflation have begun to fade. Shipping costs have gone down. Cotton, beef and other staples became cheaper. And shoppers found deeper discounts online and in malls over the holiday season as retailers tried to shed excess inventory. Consumer prices fell 0.1% in December from the previous month, according to the Labor Department. This is the largest monthly decline in nearly three years.

But the cheaper freight and raw material costs won’t immediately pass through to consumers, in part because of contracts with suppliers who set prices months in advance.

Prices are still well above what they were a year ago. The overall Consumer Price Index, which measures the cost of a wide variety of goods and services, rose 6.5% in December, according to Labor Department data. Some of the price increases are mind-boggling: the cost of large Grade A eggs more than doubled, while prices for cereals and baked goods soared 16.1%.

“There are certain prices, certain goods for which prices are going down,” said Mark Zandi, chief economist at Moody’s Analytics. “But overall the prices aren’t going down. It’s just that the rate of increase is slowing down.”

Retailers, restaurants, airlines and other businesses decide to pass on price cuts or impress investors with improved profit margins. Consumers are increasingly demanding when it comes to spending. And economists wonder if the United States will enter a recession this year.

Sticky contracts, higher salaries

During the early days of the Covid pandemic, Americans continued to splurge as factories and ports temporarily closed. Containers clogged ports. Stores and warehouses struggled with out-of-stock merchandise.

This surge in demand and the limited supply contributed to the price increase.

Now these factors have begun to reverse. As Americans feel the pinch of inflation and spend on other priorities such as commuting, travel and dining out, they have bought fewer things.

Freight costs and container costs have fallen, driving down prices along the rest of the supply chain. The cost of a long-haul truckload rose 4% in December from the same period a year ago, but down nearly 8% from the record high in March, according to data from the Department of work.

The cost of a 40ft shipping container has fallen 80% below a high of $10,377 in September 2021 to hit $2,079 in mid-January, according to the World Container Index from Drewry, a consulting firm in supply chain. But it is still higher than pre-pandemic rates.

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

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

For example, Chuy’s Tex Mex locked in prices for fajita beef that are lower than what the chain paid last year, and it also plans to lock in ground beef prices in the third quarter. But diners will likely still pay higher menu prices than they were last year.

Chuy plans to raise prices by around 3% to 3.5% in February, although he has no more price hikes planned later this year due to his conservative pricing strategy. The chain’s prices rose about 7% from the year-ago period, lagging price increases in the restaurant industry as a whole.

Similarly, coffee drinkers are unlikely to see a drop in their latte and cold brew prices this year. dutch brothers 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 the middle of 2023 and until the end of 2024.

Contracts with suppliers are not the only reason for rigid prices. Labor has become more expensive for companies that need a lot of workers but have difficulty finding them. Restaurants, nail salons, hotels and doctors’ offices will still have to reckon with the cost of higher wages, Moody’s Zandi said.

A shortage of airline pilots is one of the factors likely to keep airfares higher this year. Airline ticket prices have fallen in recent months but are still up nearly 30% from a year ago, according to the most recent federal data.

However, Zandi said, if the job market remains strong, inflation declines and wages rise, Americans can better handle higher prices for airfares and other items.

According to the Bureau of Labor Statistics, annual hourly earnings rose 4.6% over the past year, which is not as high as the growth in the consumer price index in December.

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

Budget pressures for families

Top retail executives said they expect family budgets to come under further pressure in the coming year.

At least two grocery store executives, Hooks CEO Rodney McMullen and Cabbage growers market CEO Jack Sinclair said they don’t expect food prices to fall anytime soon.

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

He said there were exceptions. Eggs, for example, will likely become cheaper as the bird flu epidemic recedes.

Over the past two years, consumer packaged goods companies have raised the prices of items on Kroger’s shelves or reduced the size of packages, a strategy known as “shrinkflation.” McMullen said none had returned to the grocer to lower prices or increase discount levels from a year ago. Some are keeping prices aggressive as they catch up after margins were squeezed earlier in the pandemic or as they sacrifice volume for profit, he said.

To Procter & Gamble, for example, executives plan to raise prices again in February. Prices for P&G consumer staples like Pampers diapers and Bounty paper towels soared 10% from a year earlier, while demand fell 6% last quarter.

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

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

Utz Brands CEO Dylan Lissette echoed that sentiment in August, telling investors that list prices generally don’t go down even when costs go down.

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

Instead, food companies such as Utz typically offer bigger and more frequent discounts to customers as costs come down, according to Lissette, who was once in charge of pricing pretzels and kettle chips. Utz.

Over the next few years, companies could reverse “shrinkflation” packaging changes that would result in cheaper snacks per ounce. And two or three years later, shoppers could see the introduction of new economy pack sizes, Lissette said.

The ace of retailers in the hole

But retailers may be able to speed up that time frame. They may use their own lower-priced private brands, such as peanut butters, cereals, and laundry detergents that resemble well-known national brands.

Last fall, Kroger launched Smart Way, a new private label with more than 100 items like loaves of bread, canned vegetables and other food staples at its lowest price point.

McMullen said the grocer was already planning to launch private label, but had accelerated its debut by about six to nine months due to shoppers’ interest in value amid inflation. And he added that if a national brand is losing market share, it is more likely to be aggressive on discounts, or even lower the price permanently.

Zandi, the Moody’s economist, said while customers may become frustrated, they are not helpless. By choosing competing brands or opting for promotional items, they can send a message.

“Businesses respond to buyers,” he said. “If consumers are price-aware, price-sensitive, that will go a long way in convincing business people to stop raising prices and maybe even offer a discount.”

—CNBC Leslie Joseph contributed to this story.

Leave a Comment