Price pushback could help defeat inflation
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Gone are the days when companies could hike prices with little pushback from consumers. Now, in an effort to keep shoppers spending, "value" and "promotions" are back.
Why it matters: The recovery from supply shocks helped bring inflation down from its peak; more shoppers pushing back against high prices could assist in driving inflation down to normal.
- "Softer consumer spending growth due to increased pricing sensitivity" and reduced business markups will continue to provide a "healthy disinflationary impulse," EY-Parthenon chief economist Gregory Daco wrote in a report last week.
The big picture: Anecdotes from corporate earnings calls this week show a continuation of trends seen over the last few quarters. Many large restaurant and consumer brands are rolling back price hikes to lure price-sensitive shoppers.
- "There's no doubt it's this kind of a value war out there with everybody just racing to get to the next offering," Kelli Valade, CEO of restaurant chain Denny's, told analysts Tuesday.
- Starbucks executives said Tuesday that the coffee company is focused on savings from higher productivity that could mean more deals for its customers.
Snack-maker Mondelēz has "new targeted promotions" for brands like Chips Ahoy! that it says are most impacted by consumer pullback.
- "These days we have to be much more aware at which price point we offer a pack," CEO Dirk van de Put told analysts Tuesday.
- "People are value-seeking, and hence promotional intensity has been particularly strong," Nestlé CEO Ulf Mark Schneider said last week.
Between the lines: In past economic cycles, McDonald's benefited when consumers felt stretched and opted to eat at its restaurants instead of pricier options. Now, it's more complicated.
- "We are seeing the benefit of trade down, but it's just not enough to offset the pressure that we're seeing on that low-income consumer," CEO Chris Kempczinski said this week, adding that the company plans to absorb some higher costs rather than pass them on to customers.
- "You're seeing with that low-income consumer, in many cases, they're dropping out of the market — eating at home and finding other ways to economize, cutting down on trips."
The intrigue: Top White House economist Jared Bernstein told a room of researchers and reporters Tuesday that price sensitivity would help complete inflation's "round trip" — that is, bring it back to pre-pandemic norms.
- Consumers were less likely to push back against higher prices during pandemic times, when fiscal support helped ease pressure on budgets.
- "As excess savings have largely burnt off, even as real wages and disposable incomes are posting solid gains, the price elasticity of demand appears to have reawakened," Bernstein, chair of the Council of Economic Advisers, said at the Economic Policy Institute.
