The great inflation spike of the past three years is nearly spent \u2014 and economists credit American consumers for helping slay it.<\/p>\n

Some of America’s largest companies, from Amazon to Disney to Yum Brands, say their customers are increasingly seeking cheaper alternative products and services, searching for bargains or just avoiding items they deem too expensive. Consumers aren’t cutting back enough to cause an economic downturn. Rather, economists say, they appear to be returning to pre-pandemic norms, when most companies felt they couldn’t raise prices very much without losing business.<\/p>\n

\u201cWhile inflation is down, prices are still high, and I think consumers have gotten to the point where they\u2019re just not accepting it,\u201d Tom Barkin, president of the Federal Reserve Bank of Richmond, said last week at a conference of business economists. “And that\u2019s what you want: The solution to high prices is high prices.\u201d<\/p>\n

A more price-sensitive consumer helps explain why inflation has appeared to be steadily falling toward the Federal Reserve’s 2% target, ending a period of painfully high prices that strained many people’s budgets and darkened their outlooks on the economy. It also assumed a central place in the presidential election, with inflation leading many Americans to turn sour on the Biden-Harris administration’s handling of the economy.<\/p>\n

The reluctance of consumers to keep paying more has forced companies to slow their price increases \u2014 or even to cut them. The result is a cooling of inflation pressures.<\/p>\n

Other factors have also helped tame inflation, including the healing of supply chains, which has boosted the availability of cars, trucks, meats and furniture, among other items, and the high interest rates engineered by the Fed, which slowed sales of homes, cars and appliances and other interest rate-sensitive purchases.<\/p>\n

Still, a key question now is whether shoppers will pull back so much as to put the economy at risk. Consumer spending makes up more than two-thirds of economic activity. With evidence emerging that the job market is cooling<\/a>, a drop in spending could potentially derail the economy. Such fears caused stock prices to plummet a week ago<\/a>, though markets have since rebounded.<\/p>\n

This week, the government will provide updates on both inflation and the health of the American consumer. On Wednesday, it will release the consumer price index for July. It’s expected to show that prices \u2014 excluding volatile food and energy costs \u2014 rose just 3.2% from a year earlier. That would be down from 3.3% in June and would be the lowest such year-over-year inflation figure since April 2021.<\/p>\n

And on Thursday, the government will report last month’s retail sales, which are expected to have climbed a decent 0.3% from June. Such a gain would suggest that while Americans have become vigilant about their money, they are still willing to spend.<\/p>\n

Many businesses have noticed.<\/p>\n

\u201cWe\u2019re seeing lower average selling prices … right now because customers continue to trade down on price when they can,\u201d said Andrew Jassy, CEO of Amazon.<\/p>\n

David Gibbs, CEO of Yum Brands, which owns Taco Bell, KFC and Pizza Hut, told investors that a more cost-conscious consumer has slowed its sales, which slipped 1% in the April-June quarter at stores open for at least a year.<\/p>\n

\u201cEnsuring we provide consumers affordable options,” Gibbs said, “has been an area of greater focus for us since last year.\u201d<\/p>\n

Other companies are cutting prices outright. Dormify, an online retailer that sells dorm supplies, is offering comforters starting at $69, down from $99 a year ago.<\/p>\n

According to the Fed’s \u201cBeige Book,\u201d an anecdotal collection of business reports from around the country that is released eight times a year, companies in nearly all 12 Fed districts have described similar experiences.<\/p>\n

\u201cAlmost every district mentioned retailers discounting items or price-sensitive consumers only purchasing essentials, trading down in quality, buying fewer items or shopping around for the best deals,\u201d the Beige Book said last month.<\/p>\n

Most economists say consumers are still spending enough to sustain the economy consistently. Barkin said most of the businesses in his district \u2014 which covers Virginia, West Virginia, Maryland and North and South Carolina \u2014 report that demand remains solid, at least at the right price.<\/p>\n

\u201cThe way I\u2019d put it is, consumers are still spending, but they\u2019re choosing,\u201d Barkin said.<\/p>\n

In a speech a couple of weeks ago, Jared Bernstein, who leads the Biden administration’s Council of Economic Advisers, mentioned consumer caution as a reason why inflation is nearing the end of a \u201cround trip\u201d back to the Fed’s 2% target level.<\/p>\n

Emerging from the pandemic, Bernstein noted, consumers were flush with cash after receiving several rounds of stimulus checks and having slashed their spending on in-person services. Their improved finances \u201cgave certain firms the ability to flex a pricing power that was much less prevalent pre-pandemic.” After COVID, consumers were \u201cless responsive to price increases,\u201d Bernstein said.<\/p>\n

As a result, \u201cthe old adage that the cure for high prices is high prices (was) temporarily disengaged,\u201d Bernstein said.<\/p>\n

So some companies raised prices even more than was needed to cover their higher input costs, thereby boosting their profits. Limited competition in some industries, Bernstein added, made it easier for companies to charge more.<\/p>\n

Barkin noted that before the pandemic, inflation remained low as online shopping, which makes price comparisons easy, became increasingly prevalent. Major retailers also held down costs, and increased U.S. oil production brought down gas prices.<\/p>\n

\u201cA price increase was so rare,” Barkin said, \u201cthat if someone came to you with a 5% or 10% price increase, you almost just threw them out, like, \u2018How could you possibly do it?\u2019 \u201d<\/p>\n

That changed in 2021.<\/p>\n

\u201cThere are labour shortages,” Barkin said. \u201cSupply chain shortages. And the price increases are coming to you from everywhere. Your gardener is raising your prices, and you don\u2019t have the capacity to do anything other than accept them.\u201d<\/p>\n

The economist Isabella Weber at the University of Massachusetts, Amherst, dubbed this phenomenon \u201csellers’ inflation” in 2023. In an influential paper, she wrote that “publicly reported supply chain bottlenecks” can \u201ccreate legitimacy for price hikes\u201d and \u201ccreate acceptance on the part of consumers to pay higher prices.\u201d<\/p>\n

Consumers are no longer so accepting, Barkin said.<\/p>\n

\u201cPeople have a little bit more time to stop and say, \u2018How do I feel about paying $9.89 for a 12-pack of Diet Coke when I used to pay $5.99?\u2019 They don\u2019t like it that much, and so people are making choices.\u201d<\/p>\n

Barkin said he expects this trend to continue to slow price increases and cool inflation.<\/p>\n

\u201cI\u2019m actually pretty optimistic that over the next few months, we\u2019re going to see good readings on the inflation side,\u201d he said. \u201cAll the elements of inflation seem to be settling down.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":"

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