In the midst of inflation, companies continue to hike prices — and reap major profits
In the midst of inflation, companies continue to hike prices — and reap major profits
On Friday, we’re slated to get new consumer spending data (and the Fed’s favorite measure of inflation) in the form of the personal consumption expenditures index, or PCE.
If some of the latest earnings reports we’ve gotten are any indication, prices are still high and consumers are still willing to pay them.
McDonald’s, PepsiCo, Procter & Gamble and Kimberly-Clark (maker of Kleenex and Huggies) have all reported big profits for the first quarter of the year. All have also raised their prices and say that, so far, it hasn’t driven consumers away.
We hold some economic truths to be self-evident. One such truth?
“Companies always want to raise prices, companies always want to make more money,” said David Wessel at the Brookings Institution. “And what has happened in recent times is demand, particularly demand for goods have been very strong. And that has allowed companies to increase prices.”
In many cases, he said companies have upped those prices more than their own costs have increased. Yet we still keep buying.
“What we are seeing from companies is that they are still able to pass along price increases with an amazing acceptance rate, as high as 95%,” explained Andrew Csicsila at AlixPartners.
Executives at those companies know that won’t be the case forever, he said. Consumers will pull back eventually.
“I think a lot of people are putting contingency plans in place for when that happens,” he said. “But in the current situation, they’re continuing to push through the price increases.”
There is evidence that consumers are starting to get more sensitive to rising prices and changing some of what they’re buying, according to Ataman Ozyildirim at economic think tank The Conference Board.
“There are some categories where there are generic brands. It’s an easy switch to make,” he said. That’s especially true with certain kinds of foods, like cereal, as well as with clothes.
People are getting increasingly frustrated with persistent inflation, said Joanne Hsu at the Surveys of Consumers at the University of Michigan.
“I think last year during the peak of inflation, consumers understood that supply chains were really putting a lot of upward pressure on prices. A lot of those supply chain constraints have eased since then,” she said. “And so consumers are continuing to be very frustrated that prices remain so incredibly high.”
But for the most part, she said they’re continuing to spend — because they just don’t have a whole lot of options.
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