Americans' refusal to continue paying higher prices could be the final blow to rising inflation in the US – The Tri-City Record

More than two thirds of economic activity is accounted for by consumer spending

WASHINGTON: The big inflation surge of the past three years is almost over – and economists are thanking American consumers for helping to contain the boom.

Some of America's biggest companies, from Amazon to Disney to Yum Brands, say their customers are increasingly seeking out cheaper alternative products and services, hunting for bargains or simply avoiding items they consider too expensive. Consumers are not saving so much that it would cause an economic downturn. Rather, economists say, they appear to be returning to pre-pandemic norms, when most companies felt they could not raise prices significantly without losing revenue.

“Even though inflation is low, prices are still high, and I think consumers have reached a point where they just won't accept that anymore,” Tom Barkin, president of the Federal Reserve Bank of Richmond, said at a business economists' conference last week. “And that's exactly what we want: The solution to high prices is high prices.”

A more price-conscious consumer explains why inflation appears to be steadily declining toward the Federal Reserve's 2% target, ending a period of painfully high prices that strained many people's budgets and clouded their economic outlook. The issue also played a central role in the presidential election, as inflation led many Americans to resent the Biden-Harris administration's handling of the economy.

Consumers' reluctance to continue paying more has forced companies to slow – or even cut – their price increases. The result is a weakening of inflationary pressures.

On Monday, the Federal Reserve Bank of New York reported that Americans' expectations for spending over the next 12 months have fallen – and with them their inflation forecast. According to a survey by the New York Fed, consumers expect their spending to increase by 4.9 percent in the coming year. That's the lowest reading since April 2021, when inflation began to rise.

And they expect inflation to average just 2.3% over the next three years, the lowest since the survey began in 2013, according to the survey. Consumers' inflation expectations can be self-fulfilling: When households expect low inflation, they tend to postpone some purchases because they believe prices will not rise much in the near future – and in some cases may even fall. This trend can keep price pressures low.

Other factors also helped contain inflation. These include the recovery in supply chains, which has increased the availability of cars, trucks, meat, furniture and other items, and high interest rates engineered by the Fed, which have slowed sales of homes, cars and appliances, as well as other interest-rate-sensitive purchases.

A key question, however, is whether consumers will shy away enough to put the economy at risk. Consumer spending accounts for more than two-thirds of economic activity, and with growing signs of a slowing labor market, a drop in spending could potentially bring the economy crashing down. Such fears caused stocks to plunge a week ago, but markets have since recovered.

This week, the government will provide an update on inflation and the health of American consumers. On Wednesday, it will release the consumer price index for July. It is expected to show that prices – excluding volatile food and energy costs – rose just 3.2% from a year ago. That would be down from 3.3% in June and the lowest inflation rate since April 2021.

And on Thursday, the government will release last month's retail sales, which are expected to have risen a notable 0.3 percent from June. Such a rise suggests that Americans are more cautious with their money but still willing to spend.

Many companies have noticed this.

“We are currently seeing lower average selling prices because customers continue to be willing to save on price when they can,” said Andrew Jassy, ​​​​CEO of Amazon.

David Gibbs, CEO of Yum Brands, which owns Taco Bell, KFC and Pizza Hut, told investors that increased consumer price consciousness had led to a decline in sales. At stores that have been open for at least a year, sales fell 1 percent in the third quarter.

“Since last year, we have increased our focus on offering consumers affordable options,” said Gibbs.

Other companies are slashing their prices. Dormify, an online retailer of dorm supplies, offers comforters starting at $69. A year ago, they were $99.

According to the Fed's Beige Book, a collection of anecdotal economic reports from across the country published eight times a year, companies in nearly all 12 Fed districts have had similar experiences.

“Almost every district mentioned that retailers were discounting their items or that price-conscious consumers were buying only what they needed, compromising on quality, buying fewer items or shopping around for the best deals,” the Beige Book said last month.

Most economists say consumers are still spending enough to keep the economy going indefinitely. Barkin said most businesses in his district – which includes Virginia, West Virginia, Maryland and North and South Carolina – report that demand remains solid, at least at the right price.

“The way I would put it is that consumers are still spending money, but they have choices,” Barkin said.

In a speech a few weeks ago, Jared Bernstein, chairman of the Biden administration's economic advisory council, cited consumer reluctance as the reason why inflation is nearing the end of its “round trip” back to the Fed's target of two percent.

After the pandemic, Bernstein said, consumers were awash in cash following multiple stimulus packages and after drastic cuts to spending on personal services. Their improved financial position “gave certain companies the ability to exert pricing power that was much less pronounced before the pandemic.” After COVID, consumers were “less responsive to price increases,” Bernstein said.

As a result, “the old adage that high prices are the cure for high prices was temporarily suspended,” Bernstein said.

Some companies raised their prices even more than necessary to cover their higher input costs, thereby increasing their profits. In some industries, Bernstein continued, reduced competition made it easier for companies to charge higher prices.

Barkin noted that inflation remained low before the pandemic as online shopping, which makes price comparisons easier, became more popular. Large retailers also kept their costs low, and increased oil production in the U.S. pushed down gasoline prices.

“Price increases were so rare,” says Barkin, “that if someone came to you with a 5 or 10 percent price increase, you almost just threw them out and wondered, 'How could you do that?'”

That changed in 2021.

“There's a labor shortage,” Barkin said. “There are bottlenecks in the supply chain. And the price increases are coming from everywhere. Your gardener is raising your prices and you have no choice but to accept them.”

Economist Isabella Weber of the University of Massachusetts at Amherst called this phenomenon “seller inflation” in 2023. In an influential paper, she wrote that “publicly reported supply chain bottlenecks” can “create legitimacy for price increases” and “create consumer acceptance of paying higher prices.”

Consumers are no longer as tolerant, Barkin said.

“People have a little more time to stop and say, ‘How do I feel if I now pay $9.89 for a 12-pack of Diet Coke when I used to pay $5.99?’ They don’t like that as much anymore, and that’s why they’re making decisions.”

Barkin said he expects this trend to continue, leading to a slowdown in price increases and a cooling of inflation.

“I'm actually quite optimistic that we'll see good inflation numbers in the next few months,” he said. “All inflation factors seem to be calming down.”

A shopper browses the cheese selection at a Target store in Sheridan, Colorado, on Oct. 4, 2023. David Zalubowski/AP File Photo

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