Consumers are increasingly resisting higher prices — and winning

WASHINGTON – Inflation has changed the way many Americans shop. Now, these changes in consumer habits are helping to reduce inflation.

Fed up with prices that are still about 19% higher on average than before the pandemic, consumers are starting to fight back. In grocery stores, they are shifting away from name brands to name-brand items, turning to discount stores or simply purchasing fewer items such as snacks or gourmet foods.

More Americans are also buying used cars, rather than new, forcing some dealers to offer discounts on new cars again. But the growing consumer reaction to what critics denounce as price gouging has been most evident in food as well as in consumer goods such as paper towels and napkins.

In recent months, consumer resistance has prompted major food companies to respond by sharply slowing price increases from their peak of the past three years. This does not mean that grocery prices will fall to their levels of a few years ago, although the prices of some items, including eggs, apples and milk, are below their peak. But moderate increases in food prices would help cool overall inflation, which has fallen sharply from its peak of 9.1% in 2022 to 3.1%.

Public frustration with prices has become a central issue in President Joe Biden's re-election bid. Polls show that despite the significant decline in inflation, many consumers are unhappy with prices remaining much higher than they were before inflation began to accelerate in 2021.

Biden has echoed criticism from many left-leaning economists that companies have raised their prices more than needed to cover their rising costs, allowing themselves to boost their profits. The White House also attacked “deflationary inflation,” whereby a company, instead of raising the price of a product, reduces the quantity inside the package. In a video released at Super Bowl Sunday, Biden denounced deflation as a “scam.”

Consumer opposition to higher prices suggests to many economists that inflation should fall further. This would make this bout of inflation markedly different from the debilitating price spikes of the 1970s and early 1980s, which took much longer to overcome. When high inflation persists, consumers often develop an inflationary psychology: increasingly higher prices prompt them to speed up their purchases before costs rise, a trend that can itself perpetuate inflation.

“That was the fear — that everyone would tolerate higher prices,” said Gregory Daco, chief economist at EY, a consulting firm. He pointed out that this did not happen. “I don't think we've moved into a high inflation regime.”

Instead, this time many consumers reacted like Stuart Dryden, a commercial underwriter at a bank who lives in Arlington, Virginia. On a recent trip to his regular grocery store, Dryden, 37, noted significant price disparities between Kraft Heinz-branded products and their store-brand competitors, which he now prefers.

Dryden, for example, loves cream cheese and bagels. A 12-ounce tub of Kraft Philadelphia cream cheese costs $6.69. He noted that the store brand is only $3.19.

The price for a 24-count box of Kraft Single Cheese Slices is $7.69; Store sticker, $2.99. The price of a 32-ounce bottle of Heinz ketchup is $6.29, while the alternative is only $1.69. There were similar gaps with cheese and grated cheese products.

“Those five products alone actually cost close to $30,” Dryden said. The replacements were less than half that amount, he calculated, about $13.

“I've tried the private label options, and the quality is the same, and it doesn't make sense to switch from products I used to buy a lot of to just private label,” Dryden said.

Kraft Heinz spokesman Alex Abraham said its costs rose 3% in the last three months of last year, but the company raised its prices by only 1%.

“We are doing our best to find efficiencies in our factories and other parts of our business to offset and mitigate additional price increases,” Abraham said.

Last week, Kraft Heinz said sales fell in the final three months of last year as more consumers switched to cheaper brands.

Dryden has taken other steps to save money: A year ago, he moved into a new apartment after his previous landlord raised his rent by about 50%. His previous apartment was located next to a relatively expensive grocery store, Whole Foods. He now shops at the nearby Amazon Fresh store, and has started visiting the Aldi grocery store that has a sale every two weeks.

PepsiCo, Kimberly-Clark, Procter & Gamble and many other consumer food and packaged goods companies have exploited the rise in input costs caused by supply chain disruptions and Russia's invasion of Ukraine to dramatically increase their investments, says Samuel Reines, an investment strategist at Corpo. Prices – and increased profits – in 2021 and 2022.

One contributing factor was that millions of Americans enjoyed strong wage gains and received stimulus checks and other government aid, making it easier for them to pay the higher prices.

However, some have decried this phenomenon as “greed inflation.” In a paper published in March 2023, economist Isabella Weber of the University of Massachusetts at Amherst referred to this phenomenon as “seller inflation.”

However, late last year, many companies discovered for themselves that this strategy was no longer working. Most consumers have long spent the savings they accumulated during the pandemic.

Low-income consumers, in particular, are accumulating credit card debt and falling behind on their payments. Americans generally spend more cautiously. Daco points out that overall sales during the holiday shopping season rose just 4% — most of which reflected higher prices rather than consumers actually buying more stuff.

As an example, Raines points to Unilever, which makes, among other products, Hellmann's mayonnaise, Ben & Jerry's ice cream and Dove soap. Unilever raised its prices by 13.3% on average across its brands in 2022. Its sales volume fell by 3.6% that year. In response, it raised prices by just 2.8% last year; Sales increased by 1.8%.

“We are starting to see that the consumer is no longer willing to accept higher prices,” Raines said. “So companies started to become more skeptical of their ability to make price the driver of their revenue. They had to come back in these quantities, and the consumer wasn't reacting in the way they were happy with.”

More recently, Unilever itself attributed the weak sales performance in Europe to “own-brand share losses.”

Other companies have noticed, too. After their sales declined in the last three months of last year, PepsiCo executives indicated that they would rein in price increases this year and focus more on boosting sales.

“In 2024, we see…costs returning to normal, and inflation normalizing,” CEO Ramon Laguarta said. “So we see everything moving towards long-term pricing trends.”

Jeffrey Harmening, CEO of General Mills, which makes Cheerios, Cheeks Cereal, Progreso soup and dozens of other brands, acknowledged that his customers are increasingly looking for deals.

McDonald's executives said consumers with incomes under $45,000 visit less and spend less when they visit and say the company plans to highlight its lower-priced merchandise.

“Consumers are more cautious – and concerned – about pricing, and we will continue to be consumer-led in our pricing decisions,” Ian Borden, the company's chief financial officer, told investors.

Officials at the Federal Reserve, the country's main inflation-fighting institution, have cited consumers' growing reluctance to pay higher prices as a main reason why they expect inflation to fall steadily to their 2% annual target.

“Companies are telling us that price sensitivity is much higher now,” Mary Daly, president of the Federal Reserve Bank of San Francisco and a member of the Fed’s interest rate-setting committee, said last week. “Consumers don't want to buy unless they get a 10% discount. … This is a serious improvement in the role consumers play in controlling inflation.”

Surveys of the Federal Reserve's regional banks have found that companies across all industries expect to impose smaller rate increases this year. The New York Fed says companies in its district plan to raise rates about 3% on average this year, down from about 5% in 2023 and up to 7% to 9% in 2022.

Such trends suggest companies were on track to slow price increases before Biden's recent attacks on price gouging.

“Consumers are stronger than President Biden,” said Claudia Sahm, founder of SAHM Consulting and a former Fed economist.