As inflation rises, consumers shrug off price hikes

ONE The strange cycle continues to play out in the US economy: prices go up, forecasters predict that consumers will cut back on spending, and then we learn that consumers aren’t bothered by rising prices.

The government’s latest inflation figures, published on Tuesday 14 March, suggest this is still the case. The Consumer Price Index in February rose 6% from the same period a year ago, signaling that inflation has not slowed as much as economists had hoped. Food costs rose 9.5% from last February, electricity rose 12.9% and housing rose 8.1%.

The inflation numbers come after better-than-expected jobs numbers in February and the government saying in late February that US consumer spending rose in January by the most in nearly two years.

Many economists have explained away these ever-increasing inflation numbers by suggesting that this is simply a data collection problem. The 8.1% increase in housing costs—one of the largest increases since the early 1980s—accounted for 60% of the total increase in the cost of all items except food and energy. But the government’s shelter data may not reflect what’s actually happening in the housing market. After all, rents are already falling and the housing market appears to be softening. Take out the shelter jump, says Gregory Daco, chief economist at consultancy EY Parthenon, and prices of goods and services are rising at a slower pace than they have in previous months – the overall urban consumer price index rose 0 .4% from the previous month, while in January it increased by 0.5%. “We may be very surprised by a transition to very low inflation in the coming months,” he says.

But there’s another way to look at these inflation numbers, and in this strange economic cycle: prices keep rising because consumers just don’t care that much anymore. After all, brands like Procter & Gamble and Unilever continue to raise their prices and say they will continue to do so this year. The cost of eating at home — essentially groceries — rose 10.2% from last year.

Almost half of the 100 consumer packaged goods companies surveyed by Advantage Solutions, an industry consultancy, said they planned to raise prices in the first six months of 2023. Even Nestle, the world’s largest food group, said that it raised prices by 8.2% last year and will continue to raise prices in 2023.

In previous eras, when companies raised their prices, they expected consumers to stop spending or at least buy less expensive brands. But that doesn’t seem to be the case this time.

“In pricing for inflation, we’ve been relentless,” Michael McCain, chairman and CEO of packaged meats company Maple Leaf Foods, said on a March 9 earnings call, adding that the company would take “accelerated pricing action” in the first half of 2023. However, the company said, consumers continued to spend. Over the past year, several other companies have told investors they raised prices and were surprised that consumers didn’t seem to react too strongly. (Inflation figures show the price of ham has risen 3% since January.)

Some economic research shows that this is not just a 2023 phenomenon, but that consumers have become more involved in price increases over time. One paper looked at markups on consumer products from 2006 to 2019 and found that companies continued to raise the cost of their products and that consumers did not change their behavior – they continued to buy the same brands and products. Consumers became about 30% less price-sensitive over the time period, the paper estimated. In one example, consumers shopping around would have found that the same allergy medication was priced at $13 at one store and $18 at another—but were willing to just buy the more expensive one if they saw it first.

“People are primed to go out there and buy whatever is right in front of them,” says Alexander McKay, a Harvard Business School professor and one of the study’s authors. Americans may be less price-sensitive because of the increased demands on their time, he says—if time is money, they’re not going to spend a lot of time clipping coupons or going to different stores to find the cheapest products. “People say it’s not worth it to save $0.20 on an item like it was 10 years ago,” he says.

The pandemic likely accelerated this indifference as Americans balanced work and childcare and homeschooling. And indeed, the time Americans spend shopping has steadily declined over the decade, according to the American Time Use Survey.

But this time saving appears to be having an effect on inflation. The extent to which companies raise prices, McKay says, depends on how price-sensitive consumers are. If companies can continue to raise prices without pushback, he says, they will. And consumers seem to encourage it in an effort to save time. One solution, McKay says, is to be a little more active in price shopping, since even online shopping has a pretty wide price range. Otherwise, companies owe it to their shareholders to keep charging more.

“Companies keep saying they’re surprised by how insensitive consumers are to prices,” he says. “If you raise prices by 5% and consumers don’t push back, that might give you the incentive to try another price increase.”

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