Inflation’s way down, but consumers still flinch at high prices, Fed observes
Inflation’s way down, but consumers still flinch at high prices, Fed observes
In the latest Beige Book out this week, most Federal Reserve bank districts noted that retailers are offering discounts and price-sensitive consumers are buying fewer or lower-quality items.
This is the case even as inflation continues to cool. Prices actually came down in June from May, according to the latest consumer price index. So, why is price sensitivity lingering?
Pretty much anyone who eats can be price-sensitive. Even economists who track inflation, like Kayla Bruun with Morning Consult, who used to grab a bite at a nearby cafe.
“They used to have a $5 grilled cheese, and I love grilled cheese,” Bruun said. “Then, like a month ago, they raised it to $7, and I was like, ‘I just can’t pay this.'”
Bruun said she is very aware of the baseline price of the sandwich — five bucks — and how much it’s gone up. She said consumers feel the same thing when they go to the store.
“Their baseline isn’t necessarily from a year ago. It might be from 2019 or, you know, 2021,” Bruun said.
Economists measure inflation year to year and month to month, while consumers may think about the change in prices from three years ago — or longer. That can make visits to the supermarket painful, said Harvard economist Kenneth Rogoff.
“I go and see a large container of detergent costing $25, and I just can’t get used to it,” Rogoff said.
He added that macroeconomic data doesn’t calm consumers when they walk down the grocery aisle.
“They don’t want to have to think about if prices are going down,” Rogoff said. “‘Should I be happy that they’re not going up as fast?’”
It’s no wonder that many are shopping for discounts or lower-quality products. “This generation, especially younger people, they’ve just never seen inflation before, much less inflation like this,” Rogoff said.
Reactions might have been muted coming out of the pandemic, when people took a “seize the day” approach to spending, said Michael Gapen with Bank of America. But they’re more sensitive to it today.
“The rate of inflation has come down, but the price level is high,” Gapen said. “So consumer sentiment is still saying, ‘Great, inflation slowed, but I’m still adjusting to this higher price level.’ And maybe we’re half to two-thirds of the way through that story.”
He thinks consumers will adjust, but it might take a while.
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