That’s the big question. Looking for signs of widespread push-back but not finding much. Consumers pay whatever.
By Wolf Richter for WOLF STREET.
One of the bizarre factors that has driven the current surge in inflation – the worst in 30 years per CPI-U, the worst in 40 years per CPI-W – has been the sudden and radical change in the inflationary mindset among consumers and businesses.
We saw that in late 2020 and all year in 2021, when prices of new and used vehicles spiked in practically ridiculous ways. People are paying more for a one-year-old used vehicle than what a new vehicle would cost, if they could get it, and they’re paying many thousands of dollars over sticker for new vehicles.
Out the window is the ancient American custom of hunting for a deal. And yet, new and used vehicles are the ultimate discretionary purchase for the vast majority of buyers that can easily drive what they already have for a few more years. But they’re jostling for position to pay these ridiculous astounding prices. And there has been enough demand to keep inventories bare and prices soaring.
During the Great Recession, potential new-vehicle buyers went on a buyer’s strike, and sales collapsed, and two of the Big Three US automakers filed for bankruptcy, along with many component makers, and sales didn’t recover for years. Consumers have this power because vehicle purchases are discretionary. But this time, consumers aren’t exercising their power to put a stop to those price spikes. Instead, they’re paying whatever.
We’ve also seen this with the price of gasoline, which at the end of November had spiked by 59% year-over-year and by 31% compared to November 2019, to an average of $3.38 per gallon, according to the EIA.
And yet, consumption of gasoline has completely recovered from the collapse and is back where it had been in November 2019, and the surge in price had zero impact on demand. Will gasoline have to go to $5 or $6 on average across the US before demand takes a hit? $7? At what point are consumers going to push back? Consumption in November ran at 9.16 million barrels per day, same as two years ago:
The same has been the case in other categories, unrelated to consumer goods. For example, rents have been spiking in many markets. And house prices have spiked at a ridiculous pace to ridiculous levels.
Despite widespread and large wage increases, amid this peculiar phenomenon of the labor “shortages,” inflation is now outrunning those wage increases.
And yet, consumers are outrunning inflation with their spending. Total consumer spending, including for services, and adjusted for inflation – so “real” consumer spending – in October rose by 0.7% from September, and by 6.6% from a year ago:
How far will prices be able to rise before consumers balk?
For the first time in four decades, consumers have allowed prices to spike. In prior episodes, when prices rose beyond a certain point, consumers started to balk, buy other products, delay purchases, or take those items off the list altogether, and enough demand disappeared that companies were reluctant to raise prices and were careful in doing so, and if they did, competitors were eating their lunch, and price increases had trouble sticking.
Now price increases stick, competitors aren’t competing on price anymore, and new price increases get slapped on top of the prior price increases, and consumers are paying whatever, for the first time in decades. And by still paying those prices, consumers are encouraging further price increases.
At the same time, consumers have been agitating for higher wages – they’re agitating by not returning to the labor force for some crappy job, they’re agitating by being choosy, they’re agitating by switching jobs to get more pay, leading to enormous amounts of churn as companies poach each other’s employees by offering higher wages and bonuses.
Companies are now willing to pay higher prices for labor, materials, and components in order to do business. And they will pass on those higher prices, including to the consumer. And consumers are paying those prices, and are demanding higher wages to pay those prices. And the cycle is established.
In this scenario that most people below retirement age have no working experience with, we’re looking for signs that consumers are pushing back on a larger scale – not just on an individual basis – against those price hikes. But there haven’t been a lot of signs of pushback against higher prices.
The Fed’s Beige Book, released today, specifically pointed out the lack of pushback. It summarized that “Strong demand generally allowed firms to raise prices with little pushback, though contractual obligations held back some firms from increasing prices.”
Those inconvenient contracts are keeping companies from raising prices even further. Outside of those contracts, there’s “little pushback” against price increases.
But also today, we heard from the IHS Markit US Manufacturing PMI, which surveys executives of manufacturing firms in the US, and for the first time, in terms of pushback from their own customers, we see this:
“Although firms still sought to pass on greater costs to clients, the pace of increase in prices charged slowed to the softest in three months amid signs of push-back to higher prices from customers.”
The PMI report went on to say that with signs of resistance among their customers cropping up, but input cost inflation raging, margins are getting squeezed.
If there is no widespread pushback against price increases – if consumers and businesses just pay whatever – then inflation could get a whole lot worse than it already is. But even if there is pushback, inflation will continue to rage, but at least there would be some resistance.
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