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During our recent experience with inflation, I frequently see and hear narratives about how a high willingness to pay helped to support inflationary pressures in the economy. A recent article from the AP, “Americans’ refusal to keep paying higher prices may be dealing a final blow to US inflation spike“, encapsulated this narrative as another way to announce the death of inflation. The article pointed to select but telling commentary from two notable American consumer-facing companies that are observing a change in spending behavior (quotes taken from the Seeking Alpha transcripts of the referenced earnings calls):

• Amazon.com (AMZN): “we’re seeing lower average selling prices, or ASPs, right now because customers continue to trade down on price when they can.
• Yum Brands (YUM): “The impacts from the Middle East conflict, in addition to a more cost-conscious consumer, have presented headwinds to same-store sales…ensuring we provide consumer’s affordable options has been an area of greater focus for us since last year with all of our brands having offered disruptive deals and introduced or reintroduced the track of everyday value with examples in the US such as KFC’s Taste of KFC deals, Pizza Hut’s $7 Deal Lovers, and Taco Bell’s Cravings Value Menu.”

These are of course just two companies, but their management are telling a familiar and consistent story: consumers are pushing back on price increases. They have had enough. We can no longer blame consumers for inflation.

Unwillingness to Pay

The flip side of this narrative on changing spending habits suggests that consumers played a large role in perpetuating inflationary pressures. If not for their higher willingness to pay – sometimes supported by being flush with stimulus money, sometimes supported by signalling from over-burdened supply chains (aka “seller’s inflation“) – companies would not have had the freedom to do what they do best…charge as much as the market will bear.

The Beige Book from last month is even more telling about the consumers reduced willingness to participate in the inflation game. AP pointed out the following quote under the “Prices” section in the summary:

“While consumer spending was generally reported as showing little to no change almost 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.”

AP also quoted from a speech by Tom Barkin, president of the Federal Reserve Bank of Richmond. Barkin made the observation and strong claim that “while inflation is down, prices are still high, and I think consumers have gotten to the point where they’re just not accepting it…And that’s what you want: The solution to high prices is high prices.” Consumers were too willing to pay and now they are unwilling to pay. Note that Barkin reassured the audience that consumers in his district still exhibit strong demand “at the right price.”

(On the other hand, the Fed also noted important lingering pricing pressures on the producer side: “Most Districts noted that input costs were beginning to stabilize; however, Atlanta specifically noted products like copper and electrical supplies have seen a notable increase over this period.” Later in the Beige Book, the Cleveland Fed reported on the soaring cost of health insurance: “Contact reports of increasing health insurance costs remained pronounced, and one banker said their premium level increased by 15 percent this year compared to an average of 1.6 percent annually over the past 10 years even after they “aggressively” shopped for healthcare plans.”)

Soft Landing?

A potential soft landing is part of the implication of this narrative of consumers’ unwillingness to pay. Consumers are trimming the excesses of spending without cutting down so much that they lead to recessionary pressures. According to the AP, economists estimate that consumers are simply slipping back into pre-pandemic norms of spending habits that will make it much more difficult for companies to raise prices. In other words, the demand “volume” (in terms of units) remains strong, but the spending capacity is not strong. Folks in the financial markets may observe these effects as a “growth recession” given the impact it will have on top-line growth.

Be careful out there!

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