In the background of an escalator with customers in a shopping center, a man holding a paper bag full of groceries appears surprised and upset after seeing an expensive receipt from a supermarket.
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Just before the holiday season, walmart There was encouraging news for shoppers tired of inflation. Prices for food and other necessities are falling, not rising. The retail giant said if trends continue, some of these key household categories will soon be battling deflation, a welcome move for consumers emerging from the worst price rises in decades. It will be a sight.
But the retail giant reversed its policy this week, saying prices for many household staples such as food and paper products continued to rise.
Chief Financial Officer John David Rainey told CNBC: “While deflation has occurred in certain categories and is still a possibility overall, prices are more stable than they were three months ago.” I’m doing it,” he said.
Corporate leaders have been singing a similar song in recent weeks. At a time when inflation is cooling but prices are still rising faster than the Fed would like. home depot He said that prices for home improvement products had not fallen, but had “settled down.” coca cola Manufacturers of other popular brands of snacks, soda and household products also said prices were still higher than a year ago. They’re planning more modest price increases, but shoppers shouldn’t expect price cuts either.
“If you look at inflation over the long term, we rarely end up in a period of sustained deflation. It’s not just about the consumer impact,” Coke CEO James Quincey said. He spoke on CNBC’s “Squawk on the Street” on March 13th.
The latest government data backs that up. While price increases have been declining over the years, the latest inflation indicators were higher than expected. The Consumer Price Index, a broad measure used to track how much shoppers pay for goods and services across the economy, rose 3.1% in January from a year earlier.
Food prices rose 2.6%, driven by a 5.1% rise in the price of food on the go, which includes eating at restaurants and buying from vending machines.
Although prices are still rising across the board, shoppers are feeling a sense of relief in some areas. For example, prices for household appliances, used cars, and several other categories of general goods have fallen. While some prices remain high, wages continue to rise, softening the blow.
Inflation has been top of mind for shoppers, business owners and investors over the past two years, as soaring prices have squeezed household budgets and forced shoppers to reevaluate where and how much they spend. Price hikes helped businesses offset rising input costs and maintain growth, even as consumers were forced to spend more money and purchased less. . The Fed has taken on the difficult task of reining in price increases without sending the economy into recession and slowing inflation, but shoppers are feeling only a small sense of relief.
A survey conducted by the Pew Research Center from January 16 to January 21 found that the price of everyday items was the top concern among Americans about their finances. 72% of respondents said they were “very” concerned about the price of food and consumer goods.
While deflation can bring relief to consumers, it can also be a difficult situation to overcome. In many cases, companies may choose to protect their profits rather than pass on lower input costs to consumers. Otherwise, there is a risk that sales will shrink and stock prices will fall.
Additionally, management may be reluctant to cut prices or say deflation is occurring because investors may take it as a sign that the company’s brand or the economy as a whole is weakening.
“Prices rarely fall across the board, barring a recession or a deep recession,” said Gregory Daco, EY’s chief economist.
However, he said consumers could benefit from a “correction” in prices. For example, airfares plummeted during the pandemic, skyrocketed after the pandemic, and are now flat again.
Prices that are falling and prices that are not falling
So far, the historic easing of inflation has been uneven.
Items like chicken and eggs are now more likely to be marked down at grocery stores. Tyson It said chicken prices fell by 3.9% in the first quarter of the fiscal year.egg producers karmaine foods reported that the average price per 12 eggs halved in the quarter ended December 2 compared to the same period last year, when egg prices skyrocketed. unilever Chief Financial Officer Fernando Fernandez also called for price cuts on at-home ice cream, laundry and skin cleansing bars during the company’s Feb. 8 conference call.
“Deflation was first seen in commodity-oriented categories,” said CFRA analyst Arun Sundaram. “I think it will take time for the prices of processed foods to come down.”
However, not all product prices have fallen. Cocoa, sugar and tomatoes have all increased in price recently, hurting companies such as: Kraft Heinz and nestle.chocolate maker hershey Earlier this month, the company announced that it had slightly increased the prices of some products.
Although many input cost pressures on businesses have eased, expenses are rising faster than before 2021’s unprecedented demand boom. Edwards said costs have risen by about 3% for most businesses, which is still higher than pre-pandemic inflation rates of 1-2%. Jones analyst Brittany Quattrocchi.
Chocolate bars on display for sale at the Hershey’s Chocolate World store on July 13, 2018 in Hershey, Pennsylvania.
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Products with strong brands, such as sodas and snacks, typically have more pricing power and less competition from private label products due to their unique flavors and fan following. This allows manufacturers to continue raising prices to mitigate rising costs, even if production declines.
On the other hand, for products that don’t have a distinct flavor or taste, such as peanut containers, customers are more likely to switch to cheaper products or store brands. That’s one reason Kraft Heinz sold its Planter Nuts business to Hormel three years ago.
“The more ingredients a product has, the more pricing power it typically has,” Sundaram says.
Retailers such as Target and Kroger are rolling out new private labels to better compete with national brands and lower prices. Earlier this month, Target debuted its Dealworthy brand, which consists of products such as dental floss, paper towels and shampoo. Most of the new brand items sell for less than $10.
By stealing sales, retailers can pressure domestic brands to lower prices, introduce cheaper versions, or offer discounts.
Some industry observers predict a wave of deep price cuts as food manufacturers struggle with weak demand and slow sales growth.
Many food suppliers, including Pringles maker Kraft Heinz, reported declining sales volumes in North America in recent quarters. Keranova and pepsico company Food department. Volume does not include price and currency fluctuations, giving investors a more accurate picture of demand.
Heinz ketchup on a grocery store shelf in Washington, DC, on February 15, 2023.
Stephanie Reynolds | AFP | Getty Images
Brad Thomas, retail analyst at KeyBanc, said this softening trend could force brands to cut prices or give customers another reason to buy their products, such as offering short-term promotions or innovative features. He said it would happen.
“The ongoing ‘frenemy’ between retailers and suppliers to demand lower prices is part of the normal course of business,” he said. “The difference with what’s happening now is how much larger the CPG volume is.” [consumer packaged goods] Brands are losing. ”
He predicts that dine-in prices will turn negative in the second half of this year. CFRA’s Sundaram echoed that prediction, but noted that costs also need to continue to fall.
Historically, food deflation occurs about once every 10 years and lasts about eight months, Thomas said. The last time was in 2016 and 2017, the biggest winner was Walmart. The same benefits were not seen for rival targets.
Even some of America’s biggest brands are signaling that consumers’ tolerance for high prices is waning. Some companies have said their price hikes are over or promised more modest increases this year.
A man climbs into the refrigerator for milk at a Walmart store in Rosemead, California, on November 22, 2022.
Frederick J. Brown | AFP | Getty Images
For example, Kraft Heinz said on February 14 that it expects input costs to rise 3% this year. But Oscar Mayer’s owners plan to raise prices by only 1%. The company expects productivity savings to make up the difference.
PepsiCo executives also said they expect the company to return to more “normalized” pricing in 2024. In the fourth quarter, prices at Pepsi’s North American Frito-Lay business rose 5%, while prices at its North American beverage division rose 9%. period one year ago.
Still, Thomas acknowledged that brands with strong followings like Coca-Cola are likely to keep their products’ prices high. Mid-sized brands are more vulnerable and need to reduce prices.
Who is wary of deflation?
Evercore ISI retail analyst Greg Melich said deflation could become a dirty word, just as inflation has become a dirty word.
“High inflation is bad, but deflation is also bad because there are fixed costs that don’t go down,” he said.
Wage costs are rising as new minimum wage laws take effect and the labor market continues to tighten. Many food companies are tied to supplier contracts entered into when the price of their products is high.
Deflation can also raise concerns that a company’s overall profits will decline.
KeyBanc estimates that a 1% drop in food prices would increase consumer spending by $1 billion per month, benefiting low-income households the most. But shoppers can choose to keep their savings instead of spending the extra cash.
Home Depot, for example, said lumber prices have fallen over the past year, but it still sees weak demand for large housing projects amid rising interest rates. Best Buy sells consumer electronics, another deflationary category, but has struggled to grow sales after a buying boom during the pandemic and slow product innovation.
Melich said if customers spend less on essentials like food, they may buy more discretionary items, “but you can’t assume there’s going to be a one-to-one deal.” Ta.
Wall Street echoed those concerns when Walmart said in November that deflation could soon occur. The retail giant’s stock price fell about 8%, its worst day in more than a year at the time. (Walmart’s stock price is hovering near all-time highs).
Home Depot Chief Financial Officer Richard McPhail acknowledged the weight of deflation in a recent CNBC interview.
“I’m very careful about the word ‘deflation,’ considering what it represents in people’s minds,” he said.
MacPhail said prices were “calming” rather than falling. He said the hardware store had not seen “significant changes in prices” since early August.
Walmart has scaled back its broad deflation forecast, but the company’s Chief Financial Officer Rainey said the discounter ultimately believes lowering prices is a good thing.
Walmart is experiencing deflation in its general merchandise categories, even as food prices continue to rise by low single digits year-over-year.
“Let’s be clear: We want low prices for our customers,” Rainey said.
— CNBC’s Christopher Hayes contributed to this report.
