A grocery store in New York.
Wang Ying | Xinhua News Agency | Getty Images
Inflation may cool. But for most Americans, the price of a cup of coffee or a bag of groceries hasn’t dropped.
The big question in the coming months is whether consumers will also feel relieved.
In recent months, many of the key factors driving inflation over four decades have begun to fade. Shipping costs have dropped. Cotton, beef and other raw materials have become cheaper. And shoppers found greater discounts online and in malls during the holiday season as retailers attempted to clear excess inventory. Consumer prices fell 0.1% in December from the previous month, according to the Labor Department. It was the biggest monthly drop in nearly three years.
But cheaper freight and raw material costs won’t immediately trickle down to consumers, in part because of supplier contracts that set prices months in advance.
Prices are still well above the level of a year ago. The overall consumer price index, which measures the cost of a wide range of goods and services, is up 6.5% from December, according to Labor Department data. Some of the price increases are notable: the cost of large class A eggs has more than doubled, while price tags for breakfast cereals and bakery products have increased by 16.1%.
“There are some prices, some commodities whose prices are falling,” said Mark Zandi, Moody’s Analytics chief economist. “But overall prices are not falling. It’s just that the rate of increase is slowing down.”
Retailers, restaurants, airlines and other companies decide whether to pass on price cuts or impress investors with improved profit margins. Consumers are becoming pickier when it comes to spending. And economists are weighing whether the US will slip into recession this year.
Sticky contracts, higher wages
During the early days of the Covid pandemic, Americans splurged as factories and ports temporarily closed. Containers clogged ports. Stores and warehouses had to contend with out-of-stock products.
This increase in demand and the limited supply contributed to higher prices.
Now those factors have begun to reverse. As Americans feel the inflation and spend money on other priorities like commuting, outings and eating out, they’ve been buying less stuff.
Freight costs and container costs have fallen, driving down prices in the rest of the supply chain. The cost of a long-haul truckload was up 4% in December compared to the same period a year ago, but nearly 8% lower than in March, according to data from the Labor Department.
According to Drewry’s World Container Index, a supply chain consultancy, the cost of a 40-foot shipping container is down 80% from its peak of $10,377 in September 2021 to $2,079 as of mid-January. But it’s still higher than prepandemic rates.
Food and clothing materials 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% over the same time, according to the International Coffee Organization’s composite world price. According to data from the Labor Department, the cost of raw cotton fell by 23.8%.
However, to protect against unpredictable price spikes, many companies have long-term contracts that set the prices they have to pay months in advance to run their businesses, from buying ingredients to shipping goods around the world.
For instance, Chuy’s Tex Mex prices for fajita beef are lower than what the chain paid last year, and it plans to fix prices for ground beef in the third quarter as well. But diners will likely still pay higher menu prices than last year.
Chuy plans to raise prices by about 3% to 3.5% in February, though it has no further price increases planned for later this year due to its conservative pricing strategy. The chain’s prices are up about 7% compared to the same period last year, lagging behind overall restaurant industry price increases.
Similarly, coffee drinkers are unlikely to see a drop in their latte and cold brew prices this year. Dutch Bros. Coffee CEO Joth Ricci told TSTIME 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 late 2024.
Supplier contracts aren’t the only reason for sticky prices. Labor has become more expensive for companies that need lots of employees but struggle to find them. Restaurants, nail salons, hotels and doctor’s offices will still factor in the cost of higher wages, Moody’s Zandi said.
A shortage of airline pilots is one of the factors likely to make airline tickets more expensive this year. The price of airline tickets has fallen in recent months, but is still nearly 30% higher than last year, according to the most recent federal data.
However, Zandi said if the job market remains strong, inflation eases and wages rise, Americans can better manage higher prices for airline tickets and other items.
Annual hourly wages have risen 4.6% over the past year, according to the Bureau of Labor Statistics — not quite as high as the consumer price index growth in December.
But in some categories, declining demand has translated into price cuts. Several hot pandemic items, including TVs, computers, sporting goods and major appliances, have fallen in price, according to December Labor Department data.
Budget pressure for families
Top retail executives said they expect household budgets to continue to be under pressure in the coming year.
At least two supermarket managers, Kroger CEO Rodney McMullen and Sprouts Farmers Market CEO Jack Sinclair said they don’t expect food prices to fall anytime soon.
“The rise is starting to taper off a little bit,” McMullen said. “That doesn’t mean you’re going to see deflation. We 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 get cheaper as the avian flu outbreak subsides.
Over the past two years, consumer packaged goods companies have increased the prices of items on Kroger’s shelves or decreased the size of packages, a strategy known as “shrinkage inflation.” McMullen said no one has come back to the grocer to lower prices or ramp up discount levels from a year ago. Some are holding aggressive pricing, either catching up after margins came under pressure earlier in the pandemic or sacrificing volume for profit, he said.
Bee Proctor & GambleFor example, executives plan to raise prices again in February. Prices of P&G’s consumer goods like Pampers diapers and Bounty paper towels are up 10% year over year, while demand fell 6% in the last quarter.
In other cases, companies are still dealing with factors that contributed to inflation. For example, farmers keep cows but have fewer than before the pandemic, and grains and corn are less abundant as the war in Ukraine continues, McMullen said.
“If you used to spend $80 and now 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 go back to $80.”
Utz brands CEO Dylan Lissette echoed that sentiment in August, telling investors that list prices usually don’t fall, even when costs fall.
“We don’t take something that was $1, move it to $1.10 and a year or two later we move it to $1,” he said.
Instead, food companies like Utz typically offer higher and more frequent discounts to customers as costs fall, according to Lissette, who was once responsible for pricing Utz’s pretzels and kettle chips.
In the next few years, companies may reverse “shrinkflation” packaging changes that result in cheaper snacks per ounce. And two or three years after that, customers can see the introduction of new cost-effective packaging formats, Lissette said.
The trump of the retailers
But retailers may be able to accelerate that timeline. They can use their own lower-cost store brands, such as the peanut butter, cereal, and laundry detergents that resemble the well-known national brands.
Kroger introduced Smart Way last fall, a new house brand offering more than 100 items such as breads, canned vegetables and other staples at the lowest price.
McMullen said the grocer was already planning to launch the house brand, but accelerated its debut by about six to nine months because of shoppers’ interest in value amid inflation. And he added that if a national brand loses market share, they’re more likely to become aggressive with discounts — or even permanently lower the price.
Zandi, Moody’s economist, said that while customers may be frustrated, they are not powerless. By opting for competing brands or opting for items on sale, they can send a message.
“Companies are responding to shoppers,” he said. “If consumers are price conscious and price sensitive, that will go a long way in convincing business people to stop raising prices and maybe even offer a discount.”
— CNBCs Leslie Josephs contributed to this story.