The next inflation-cooling force: Consumers are revolting against high prices
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Illustration: Shoshana Gordon/Axios
A new force is emerging that may bring inflation down further in the coming months: Americans are increasingly intolerant of price hikes.
Why it matters: Anecdotes from corporations suggest that consumers who were once unfazed by price hikes are now resisting them — and businesses have to do more to entice shoppers in a way not seen since before the pandemic.
- Top Fed officials say this might be a key source of disinflation that will help normalize price increases.
What they're saying: "Several national retailers have announced plans to lower prices on certain items, and there is increasing evidence that higher-income shoppers are trading down to discount stores," Fed governor Lisa Cook said in a speech on Tuesday.
- "My forecast," Cook said, is that inflation "will continue to move lower on a bumpy path, as consumers' resistance to price increases is reflected in the inflation data."
- "I have gleaned from recent earnings reports by publicly traded companies that lower-income consumers are pulling back from their purchasing and that firms are responding by moderating price increases or, in some cases, actually cutting prices," Fed governor Adriana Kugler said last week.
The big picture: The resurgence of fast food price wars tells the story of a more price-sensitive consumer.
- For value meals, it's a race to the bottom: McDonald's has a $5 value meal. Wendy's announced a $3 breakfast meal. Sandwich chain Subway launched a $3 "sandwich dipper."
A top McDonald's executive appeared on "Today" to promote the chain's offering: "I've zigzagged the country. I've been in our restaurants. I've sat in focus groups. Our customers are telling us that they are really stretched," said Joe Erlinger, president of McDonald's USA.
- "They felt the stress of the inflation of the last few years, and so this is a great opportunity for McDonald's to bring value," Erlinger said.
What to watch: Similar pressures are evident in the travel industry.
- "Competition for the price-sensitive leisure traveler is gaining steam," analysts at Bank of America wrote in a note this week, pointing out that some airlines recently eliminated change fees and JetBlue added more benefits to its basic economy offering.
Yes, but: The consumer pushback on high prices might be an early warning sign that they're facing financial stress, which could spread into broad economic weakness.
- Demand is slowing alongside early signs that consumers are falling behind on credit card payments and the labor market is losing steam.
