After three years of watching prices climb faster than a toddler on a sugar rush, it seems the everyday shopper has finally had enough. Companies from Amazon to Disney are learning the hard way that their customers aren’t willing to fork over extra cash for overpriced goods. Instead, folks are rummaging through the bargain bin, eyeing cheaper alternatives, or just flat-out saying, “Nope, not worth it.”
But don’t worry—this isn’t the kind of shift that will send the economy spiraling. According to experts, we’re just seeing a return to the good old days when companies had to think twice before jacking up prices, fearing their customers might actually walk away.
The president of the Federal Reserve Bank of Richmond, Tom Barkin, summed it up nicely, saying, “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.” Translation? Shoppers are finally saying, “Enough is enough.”
This newfound frugality is one reason inflation is creeping closer to the Fed’s magical 2% target. So, while your wallet might still feel a bit lighter, at least there’s hope on the horizon. Plus, with inflation no longer burning a hole in everyone’s pocket, the public’s mood is perking up, and that’s a win.
As more consumers resist rising prices, companies are being forced to either slow down their price increases or cut them altogether, easing inflationary pressures.
Recently, the Federal Reserve Bank of New York revealed that Americans’ expectations for their spending in the coming year have decreased, as has their inflation outlook. According to a New York Fed survey, consumers expect their spending to grow by 4.9% over the next year—the lowest level since April 2021, when inflation began surging.
Additionally, they anticipate inflation to average just 2.3% over the next three years, the lowest such figure since the survey’s inception in 2013. These expectations can become a self-fulfilling prophecy, as consumers tend to delay purchases when they expect low inflation, further reducing price pressures.
Other factors have also contributed to the decline in inflation, including the recovery of supply chains, which have improved the availability of goods such as cars, meat, and furniture. Additionally, the Federal Reserve’s high interest rates have dampened sales of homes, vehicles, and other big-ticket items.
The big question is whether consumers will cut back so much that it risks the overall economy. Consumer spending accounts for over two-thirds of U.S. economic activity. With signs that the job market is cooling, a significant drop in spending could potentially derail the economy. This concern caused stock prices to drop recently, though the markets have recovered.
The government will soon release new data on inflation and consumer spending. The upcoming consumer price index (CPI) for July is expected to show a 3.2% increase in prices (not including volatile food and energy costs) compared to last year. This is slightly lower than June’s 3.3% and would be the lowest inflation rate since April 2021.
Retail sales data for July is also expected to be released, with projections suggesting a 0.3% increase from June. Such a rise would indicate that Americans are still willing to spend despite being cautious with their money.
Businesses have certainly noticed the shift. Amazon CEO Andrew Jassy recently pointed out that customers opt for lower-priced items whenever possible. Similarly, David Gibbs, CEO of Yum Brands, which owns Taco Bell, KFC, and Pizza Hut, noted that more cost-conscious consumers have slowed the company’s sales growth, with a 1% decline in the April-June quarter for stores open for at least a year.
Companies are also beginning to lower their prices to keep customers. For instance, Dormify, an online retailer, has reduced the price of comforters from $99 last year to $69.
The Federal Reserve’s “Beige Book,” which compiles business reports from across the country, has highlighted similar trends. It notes that retailers discount items, and consumers are becoming more price-sensitive, opting to purchase only essentials, trading down in quality, or shopping around for the best deals.
While consumers are being more selective, they’re still spending enough to keep the economy going. Barkin summarized this: “Consumers are still spending, but they’re choosing.”
Jared Bernstein, head of the Biden administration’s Council of Economic Advisers, recently cited consumer caution as a key factor in inflation’s return to the Fed’s 2% target. Bernstein noted that consumers’ increased cash flow post-pandemic, thanks to stimulus checks and reduced spending on services, gave companies more room to raise prices. However, as consumers become more cautious, companies find it harder to hike prices.
Barkin remains optimistic that this trend will continue, leading to more favorable inflation readings in the coming months. “All the elements of inflation seem to be settling down,” he said.
