Home World Inflation is cooling, but high prices will remain

Inflation is cooling, but high prices will remain

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Grocery store in New York.

Wang Ying | Xinhua Agency | Getty Images

Inflation may cool down. But for most Americans, the price of a cup of coffee or a bag of groceries hasn’t budged.

The big question in the coming months is whether consumers will begin to feel some relief as well.

Over the past few months, many of the key factors that caused high inflation in the last four decades began to fade. Shipping costs have dropped. Cotton, beef and other goods became cheaper. And buyers found more significant discounts online and in malls during the holiday season as retailers tried to get rid of excess stock. Consumer prices decreased by 0.1% in December compared to the previous month, according to the Ministry of Labor. This is noted the biggest monthly drop almost three years later.

But cheaper freight and commodity costs won’t immediately flow to consumers, in part because of contracts with suppliers that set prices months in advance.

Prices are still much higher where they were a year ago. The overall consumer price index, which measures the cost of a wide range of goods and services, rose 6.5% in December, according to the Labor Department. Some price increase dazzle the eyes: The price of a large class A eggs more than doubledand for cereals and bakery products, the price tags increased by 16.1%.

“There are some prices, some commodities, prices are falling,” said Mark Zandi, chief economist at Moody’s Analytics. “But in general, prices do not fall. It’s just that the rate of growth is slowing down.”

Retailers, restaurants, airlines and other companies are deciding whether to continue cutting prices or impress investors with higher profit margins. Consumers are becoming more selective in spending. And economists are wondering whether the US will enter a recession this year.

Sticky contracts, higher salaries

In the early days of the Covid pandemic, Americans started spending money at the same time that factories and ports temporarily closed. Containers were clogging the ports. Stores and warehouses struggled with out-of-stock items.

This surge in demand and limited supply have fueled prices.

Now these factors have started to decrease. As Americans feel the pressure of inflation and spend on other priorities such as commuting, travel and dining out, they bought fewer things.

Freight and container costs have fallen, leading to lower prices for the rest of the supply chain. Long-distance truck prices rose 4% in December from a year earlier, but fell nearly 8% from a record high in March, according to the Labor Department.

The price of a 40-foot shipping container has fallen 80% from a peak of $10,377 in September 2021 to $2,079 as of mid-January, according to the Drewry World Container Index, a supply chain consulting firm. But it is still higher than the indicators before the pandemic.

Food and clothing became cheaper. According to the USDA, wholesale beef prices fell 15.6% in November from a year ago, but still remain high. Coffee beans have fallen in price by 19.7% over the same time, according to the International Coffee Organization’s consolidated world price. According to the Ministry of Labor, the price 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 pay for running their business months in advance, from buying ingredients to moving goods around the world.

For example, Chuy’s Tex Mex locked in prices for fajita beef that are lower than what the chain paid last year, and plans to lock in ground beef prices as well during the third quarter. But diners will likely still pay higher menu prices than last year.

Chuy plans to raise prices by about 3-3.5% in February, although no more price increases are planned for the end of this year due to a conservative pricing strategy. The chain’s prices rose about 7% year-over-year, lagging behind price growth in the restaurant industry as a whole.

Similarly, coffee lovers are unlikely to see the price of lattes and cold brews drop this year. Dutch Bros. Coffee CEO Jot Ritchie told CNBC that most coffee companies hedge their prices six to 12 months ahead. He predicts that prices in coffee chains may stabilize as early as mid-2023 and no later than the end of 2024.

Contracts with suppliers are not the only reason for price hikes. Labor has become more expensive for businesses that need large numbers of workers but are having trouble finding them. Restaurants, nail salons, hotels and doctors’ offices will still count toward the cost of salary increases, Moody’s Zandi said.

A shortage of airplane pilots is one factor that is likely to drive up airfares this year. Air ticket prices have fallen in recent months, but are still up nearly 30% from last year, according to the latest federal data.

However, Zandi said, if the labor market remains strong, inflation declines and wages rise, Americans will be better able to manage higher prices for airline tickets and other goods.

Annual hourly earnings increased by 4.6% over the past year, according to the Bureau of Labor Statistics, is not as high as the increase in the consumer price index in December.

However, in some categories, softening demand led to lower prices. According to Labor Department data for December, several hot items of the pandemic, including televisions, computers, sporting goods and major appliances, fell in price.

Pressure on family budgets

The retailer’s top executives said they expected household budgets to still be under pressure next year.

At least two grocery store managers, Kroger CEO Rodney McMullen and Sprouts Farmers Market CEO Jack Sinclair said they don’t expect food prices to drop anytime soon.

“The increase is starting to taper off a little bit,” McMullen said. “That doesn’t mean you’re going to start seeing deflation. We expect to see inflation in the first half. The second half will be much lower.”

He said there are some exceptions. Eggs, for example, are likely to become cheaper as the bird flu outbreak subsides.

Over the past two years, consumer packaged goods companies have raised prices on items on Kroger’s shelves or reduced package sizes, a strategy known as “shrinkage.” McMullen said no one was returning to the grocer to lower prices or increase discount levels a year ago. Some are maintaining aggressive pricing, playing catch-up after shrinking margins at the start of the pandemic or sacrificing volume for profits, he said.

U Procter & Gamblesuch as managers They plan to raise prices again in February. Prices for P&G’s consumer products, such as Pampers diapers and Bounty paper towels, rose 10% year over year, while demand fell 6% in the latest quarter.

In other cases, companies are still dealing with factors that contributed to inflation. For example, farmers are raising cows, but there are fewer of them than before the pandemic, and there is less grain and corn because the war in Ukraine continues, according to McMullen.

“If you used to spend $80 and now you spend $90 [on groceries]I think you’ll spend $90 for a while, he said. “I don’t think it’s going to go back to $80.”

Utz brands CEO Dylan Lissett echoed that sentiment back in August, telling investors that prices typically don’t fall even when costs fall.

“We don’t take something that’s $1, move it to $1.10 and then a year or two later to $1,” he said.

Instead, food companies like Utz typically offer steeper and more frequent discounts to customers as costs fall, according to Lisette, who was once in charge of pricing for Utz’s pretzels and chips.

Over the next few years, companies may roll back packaging changes that make snacks cheaper per ounce. And two to three years after that, shoppers may see new package sizes, Lisette said.

The retailer is an ace in the field

But retailers can accelerate this timeline. They can use their own, lower-priced private brands, such as peanut butter, cereal and laundry detergents, that resemble well-known national brands.

Last fall, Kroger launched Smart Way, a new private label brand with more than 100 items, such as loaves of bread, canned vegetables and other foods, at the lowest prices.

McMullen said the grocer had already planned to launch a private label, but pushed its debut by about six to nine months due to shoppers’ interest in value amid inflation. And he added that if a national brand loses market share, it’s likely to become more aggressive with discounts — or even permanently lower the price.

Zandi, the Moody’s economist, said that while customers may be disappointed, they are not powerless. By choosing competing brands or making stock selections, they can send a message.

“Businesses are responding to customers,” he said. “If consumers are careful about prices, it will go a long way in persuading businessmen to stop raising prices and maybe even give a discount.”

— CNBC Leslie Josephs contributed to this story.

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