Hobby Works President Michael Brey knows his customers are fed up with price increases, so heâs stocking up on less costly products he thinks people will actually go for. At his stores in Rockville and Laurel, Maryland, the pandemic-era days of passing on price hikes for items like train sets, remote-controlled cars and drones are over.
âWe canât raise our prices because consumers have kind of maxed out,â Brey said. âWe are doubling down on these newer, smaller, entry-level items because theyâre at a price point that we think will work for consumers in the current environment.â
Across the US, businesses like Breyâs are reporting a growing constraint on their ability to increase prices. Diminished pricing power should help slow inflation, which has already cooled substantially from the peaks registered two years ago. That could help give Federal Reserve officials comfort to continue cutting interest rates even when incoming inflation data, like the most recent report on consumer prices, is bumpy.
âThat it is harder for businesses to pass on prices is an indication that the Fedâs tighter policy stance has been working in reducing inflation,â said Sarah House, senior economist at Wells Fargo. âThis will be an important element for them to keep an eye on as theyâre trying to finish that last mile of the inflation fight.â
After opting for an outsize half-point interest-rate cut to kick off their easing cycle in September, Fed officials received hotter-than-expected monthly inflation numbers. That and an acceleration in hiring in the latest monthly jobs report have led to some speculation that the US central bank could consider pausing rate cuts at coming meetings.
Policymakers have mostly downplayed such prospects, in part by citing what theyâre hearing from business contacts about the outlook. Fed Governor Christopher Waller, speaking on Oct. 14 a few days after the latest report on consumer prices, called the numbers âdisappointing.â But he added that reports from firms about waning pricing power are among the reasons he expects âincreases will be modest going forward.â
Richmond Fed President Thomas Barkin and his San Francisco counterpart, Mary Daly, both made similar comments following the inflation report, citing anecdotes of increasingly cost-conscious consumers doing things like buying private-label products instead of branded ones.
âYou see a lot more promotions. You see a lot more price reductions. You see a lot more channel-shifting, and thatâs whatâs bringing inflation down,â Barkin said at an Oct. 10 event. âThatâs how itâs supposed to work, which is that high prices eventually fix high prices because people make other choices.â
As the economy reopened following the onset of the Covid-19 pandemic, businesses hiked prices as they faced strong consumer demand, widespread supply-chain disruptions and a generational opportunity to charge more. This year, however, the tide has turned.
Some $2.1 trillion in extra savings Americans accumulated between the pandemicâs onset and August 2021 were fully spent by March 2024, according to San Francisco Fed research. Meanwhile New York Fed data show a steady rise in the number of Americans behind on credit-card payments. And wage growth has cooled amid a slowdown in hiring, leaving shoppers choosier about what they buy and how much they pay for it.
In September, a net 25 percent of small businesses said they were planning to raise prices in the next three months, according to a National Federation of Independent Business survey. That puts the measure back in its pre-pandemic range after rising as high as 54 percent in late 2021.
Corporate earnings calls tell a similar story. Dirk Van de Put, chief executive officer of Oreo-maker Mondelez International, told analysts in September that while the company will raise some prices, it will do so âin steps so that we can see how the consumer reaction isâ while âputting in place very close follow-up mechanisms.â
Narrowing profit margins also point to waning pricing power, according to Wells Fargoâs House. While economy-wide margins remain well above pre-pandemic levels, theyâve come down substantially in the retail and wholesale trade sectors after surging in 2021 and 2022.
At Hobby Works, Brey said customers in recent years were willing to take price increases âon the chin.â But now, they wonât pay more than what they perceive to be a reasonable price, causing sales declines in some of the storesâ departments. Heâs managing that by stocking up on more affordable products, like a small remote-controlled car in the $150 to $200 range.
Some important indicators point to ongoing consumer resilience. Retail sales bested expectations in September, putting economic growth on track for its strongest quarter in a year, according to an Atlanta Fed model.
Fun Stuff
But persistent price increases for essentials like shelter, health care and insurance are limiting how much businesses can charge for discretionary categories, House said.
âWeâre still looking at a pretty healthy consumer,â she said. âBut right now, just given the inflation weâve seen in those non-discretionary items, thatâs leaving less money left over to go spend on the fun stuff.â
Results of a periodic Fed survey of regional business contacts published Wednesday showed businesses across the country are seeing rising price sensitivity among their customers.
In the Atlanta district, for example, âcontacts reported a continued trend of declining discretionary spending and trading down to lower-priced goods and services,â the report said. âThough this was still mostly concentrated among lower-income groups, middle- to high-income consumers, while continuing to spend, became more selective with purchases and sought discounts.â
Ernest Lee, chief commercial officer at citizenM, a hotel chain with locations in several large US cities, said pricing power with leisure travellers has been challenged this year. He attributes that to consumers spending down cash they saved during the pandemic and the crunch high borrowing costs have put on household budgets. He said a decline in booking lead times this year is one sign of the emerging trend.
âThe consumer feels that there will be enough inventory to purchase later or closer to their tripâ and they can âstill get within their budget,â Lee said.
By Amara Omeokwe