Inflation is cooling down, but high prices will continue

Inflation may be cooling down. However, for most Americans, the price of a cup of coffee or a bag of groceries hasn’t changed.

In the coming months, the big question is whether consumers will begin to feel some relief.

Over the past few months, many key factors have driving inflation to the highest level in four decades has begun to fade. Shipping costs have been reduced. Cotton, beef and other commodities have become cheaper. And shoppers find deeper discounts online and in shopping malls during the holiday season, when retailers tried to clean up excess inventory. Consumer prices down 0.1% in December month-on-month, according to the Labor Department. It marks biggest monthly drop for almost three years.

However, freight costs and cheaper goods don’t reach consumers immediately, in part because supplier contracts set prices months in advance.

The price is still much higher where they were a year ago. The headline consumer price index, which measures the cost of a wide range of goods and services, is up 6.5% through December, according to Labor Department data. Some price increases Stunning: High Grade A cost eggs have more than doubledwhile the price of cereals and bakery products increased by 16.1%.

“There are some price levels, some commodities are falling,” said Mark Zandi, chief economist at Moody’s Analytics. “But overall, prices aren’t falling. It’s just that the rate of growth is slowing.”

Retailers, restaurants, airlines and other companies are deciding whether to pass on discounts or impress investors with improved margins. Consumers are becoming more picky about spending. And economists are weighing whether the US will slip into a recession this year.

Now, those factors have begun to reverse. As Americans feel the pressure of inflation and spend on other priorities like commuting, travel, and eating out, they bought less stuff.

Transportation and container costs have dropped, driving down prices for the rest of the supply chain. The cost of a long-haul truck ride rose 4% in December from a year earlier, but down nearly 8% from March’s record high, according to Labor Department data.

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

Food ingredients and clothing have become cheaper. Wholesale beef prices fell 15.6% in November from a year ago, but are still at historic highs, according to the U.S. Department of Agriculture. Coffee beans fell 19.7% during the same period, according to the International Coffee Organization’s global aggregate prices. According to Labor Department data, raw cotton prices fell 23.8%.

However, to protect against unpredictable price spikes, many companies have long-term contracts that set the price they pay to run their businesses months in advance, from purchasing raw materials to shipping. goods around the world.

Eg, Chuy’s Tex Mex locked the price of fajita beef lower than the price the chain paid last year, and it also plans to lock in the price of ground beef in the third quarter. But diners will likely still pay higher menu prices than they did last year.

Chuy plans to raise prices around 3% to 3.5% in February, though it has no plans to raise prices further later this year due to its conservative pricing strategy. The chain’s prices increased by about 7% year-on-year, following the overall price increase of the restaurant industry.

Likewise, coffee drinkers are unlikely to see the price of latte and cold coffee drop this year. Dutch brothers The coffee CEO Joth Ricci told CNBC that most coffee businesses hedge their prices 6 to 12 months in advance. He predicts the prices of coffee chains could stabilize as early as mid-2023 and late 2024 at the latest.

Contracts with suppliers are not the only reason prices are fixed. Labor becomes more expensive for businesses that need a lot of workers but have difficulty finding them. Moody’s Zandi said restaurants, nail salons, hotels and doctors’ offices will still account for higher wage costs.

The shortage of airline pilots is one of the factors that could make airfares more expensive this year. Airfares have fallen in recent months but are still up nearly 30% from last year, according to the most recent federal data.

Still, Zandi said, if the job market remains strong, inflation falls, and wages rise, Americans can better manage higher prices for airline tickets and other commodities.

Hourly annual earnings have increased by 4.6% over the past year, according to the Bureau of Labor Statistics — not as high as the increase in the consumer price index in December.

In some categories, however, the reduced demand has translated into a drop in prices. Several pandemic hot items, including TVs, computers, sporting goods and major appliances have dropped in price, according to Labor Department data from December.

At least two grocery executives, grocery CEO Rodney McMullen and Sprout farmers market CEO Jack Sinclair said they don’t expect food prices to drop anytime soon.

“The gains are starting to fade a little bit,” McMullen said. “That doesn’t mean you’ll start to see deflation. We expect to see inflation in the first half of the year. The second half will be significantly lower.”

He said there are some exceptions. For example, eggs may become cheaper when the bird flu epidemic recedes.

Over the past two years, packaged consumer goods companies have either increased the price of items on Kroger’s shelves or reduced the size of their packages, a strategy known as “miniature inflation.” McMullen said no grocer has come back to lower prices or increase discounts from a year ago. Some are keeping prices high, either as they catch up after margins were squeezed earlier during the pandemic or when they sacrificed volume for profit, he said.

In Procter & GamblingFor example, chief executive officer plan to raise prices again in February. Prices for P&G staples such as Pampers diapers and Bounty tissues rose 10% year-over-year, while demand fell 6% in the latest quarter.

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

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

Brand Utz CEO Dylan Lissette echoed that sentiment in August, telling investors that list prices often don’t fall even as costs fall.

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

Instead, food companies like Utz often offer more frequent and steep discounts to customers as costs fall, according to Lissette, who was in charge of pricing Utz’s cookies and chips.

Over the next few years, companies could reverse “inflation-shrinking” packaging changes that lead to cheaper snacks on a per-ounce basis. And two or three years later, shoppers could see the introduction of new value pack sizes, Lissette said.

But retailers can speed up that time. They can use their own low-cost private brands, such as peanut butter, cereals and laundry detergents similar to well-known national brands.

Last fall, Kroger launched Smart Way, a new private brand with over 100 items such as loaves, canned vegetables and other essentials at the lowest prices.

McMullen said the grocer had planned to launch a private label, but accelerated the launch by about six to nine months because shoppers were concerned about value amid inflation. And if a national brand loses market share, he adds, it’s more likely to drastically cut prices — or even permanently lower them.

Zandi, chief economist at Moody’s, said that while customers may become frustrated, they are not helpless. By choosing competing brands or selecting items on sale, they can send a message.

“Businesses respond to shoppers,” he said. “If consumers are price-conscious, price-sensitive, then it’s going to be a lot of work to convince entrepreneurs to stop raising prices and maybe even lower them.”

– CNBC Leslie Josephs contributed to this story.