Although US consumer prices provided more signs of relief to consumers in April, there are still factors that keep inflation high – and businesses may be reaping the benefits.
“We’ve been in a really unfortunate situation where we’ve had three very, very different inflationary waves caused by very different things,” Paul Donovan, chief economist, UBS Global Wealth Management, told Yahoo Finance (video above). “They came one after another. So it looks like you have this continuous period of inflation.”
The first wave, especially in consumer durables, “was driven by demand,” Donovan explained. It’s over. Durable commodity prices in the United States are falling. You have an outright contraction.
It came on the heels of a second wave of supply-side inflation, he added, “and that was the energy shock from the war in Ukraine.” Then “the third wave of inflation — which we’re getting now — is a story of extraordinary profit-driven inflation.”
I called sometimesexcuseOr “greedy inflation,” profit-based inflation occurs when consumer-facing firms at the end of the supply chain persuade shoppers to accept higher prices by pointing to plausible explanations (such as historically high inflation). However, Donovan said, these can be caused Higher prices are more about widening margins and keeping investor sentiment high than increasing input costs.
“She uses excuses,” Donovan said. She uses a cover.
Why does inflation remain constant?
The main drivers of higher prices are costs of goods sold – which includes both material and labor costs – and corporate profits.
Fortunately for consumers, material prices have dropped dramatically. the world bank It expects a 21% decline in commodity prices in 2023 compared to 2022 – which it indicated would be the largest decline since the COVID-19 pandemic.
However, prices still hover above average levels from 2015-2019. During the first quarter of 2023, some companies continued to charge price increases even as they saw similar flat or declining sales volumes.
“I think what you’re seeing happening as far as it goes, first, we obviously took some pricing off to cover the inflation that we were dealing with,” PepsiCo (PEP) Chief Financial Officer Hugh Johnston told Yahoo Finance. “As consumers move to smaller packaging, it impacts size a little bit as well. But overall, the demand for our products continues to skyrocket.”
Rising labor costs may be the biggest pitfall for the Fed’s fight against inflation — and a viable explanation for companies paying through higher rates.
“What I think is going to be the biggest story this year for the broader economy, especially for the Federal Reserve, is going to be the flatter employment costs,” Kevin Gordon, chief investment strategist, told Yahoo Finance.
“Look at the unit labor cost growth — it’s still well above the trend, the pre-COVID trend — and the fact that you don’t really see a decline in productivity growth or a decrease because it’s still very negative,” he said.
“So I think that convergence is going to be really important because companies can only afford these higher labor costs for so long, especially if you don’t get that revenue back and that revenue increase.”
However, corporate earnings have also played a large role in the price hike since the disruptions caused by the coronavirus pandemic.
According to an analysis published by Economic Policy InstituteCorporate earnings replaced unit business costs as the largest contributor to unit price growth in the nonfinancial corporate sector from the second quarter of 2020 to the fourth quarter of 2021, compared to historical averages from 1979-2019.
“[Corporations] And you can see that, for example, with retail profit going up as a percentage of GDP. That’s one example where we’re seeing this margin expansion under the guise of, “Oh, it’s a general inflation problem,” Donovan said. We can’t help it. But they’re actually widening the margin and basically convincing consumers to accept that.”
How long before companies rethink “excuse deflation”?
Another reason companies may feel comfortable raising prices is continued consumer power.
He said a group of company executives during the first quarter of 2023 consumers in the United States It was “healthy” and its spending remained “resilient,” with details about price increases and profit-preserving efforts provided to investors and equity analysts.
“After slowing down in the back half of 2022 a bit, we saw an uptick in the pace of payments in the first quarter, particularly in the latter parts of the quarter,” Bank of America (BAC) CEO Brian Moynihan said during the company’s first-quarter earnings. communicate. “Consumers’ financial situation remains generally good. They generally work for higher wages, still enjoy strong account balances, and have good access to credit.”
In June, however, Moynihan acknowledged that spending had “slowed” in the wake of a series of Fed interest rate increases. There is also evidence that higher prices are weighing on consumer confidence.
For example, consumer confidence fell 7% in May, “erasing nearly half of the gains made after an all-time low last June,” Joanne Hsu, director of University of Michigan polling, said in her report. latest report. “However, consumers’ views of their personal finances have not changed much since April, with stable income expectations supporting consumer spending for the time being.”
While profit-based inflation can help preserve profits in the near term for a company, it can also be detrimental to a brand’s image, if consumers see the reasons for price hikes as disingenuous—particularly as social media provides a new outlet for consumers to respond. . .
Donovan said the company’s brand could be damaged if it is accused of “profiteering” at a time when people are suffering.
“Remember, we’ve had two years of negative real wage growth across the developed world — people feel the pain,” he said. “So I think social media can help fuel profit-led inflation by creating excuses that companies can use. But it can also work by threatening brand values to get companies to rethink some of their pricing strategies.”
Because of that, profit-based inflation won’t last forever, Donovan said.
“At some point, governments or consumers realize this is happening, they say, ‘Wait, that’s not fair,’ and then they start hurting brand values,” he said. “You are perceived to be cheating or treating the consumer unfairly. And that is exactly the point we are now starting to get to.”
Brad Smith is an anchor at Yahoo Finance. Follow him on Twitter @employee.
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