Companies’ reluctance to roll back price rises poses US inflation risk

Central bankers and Biden administration officials are concerned that the reluctance of companies to lower price rises to pre-pandemic levels risks undermining efforts to cool inflation.

While the shocks triggered by the shutdown of the global economy because of the coronavirus are long gone, economic officials worry businesses have become accustomed to passing on large and frequent price rises to their customers.

Thomas Barkin, the president of the Richmond Fed who will vote on the US central bank’s policy deliberations this year, is looking closely at whether retailers regain their ability to force manufacturers of household staples to offer discounts, which they can pass on to US shoppers.

“For 30 years before Covid, inflation had gotten so grounded that companies had gotten conditioned into thinking that they didn’t have any pricing power,” Barkin told the Financial Times in an interview that took place on Tuesday. “You had globalisation, favourable demographics. No one wanted to go into Home Depot and table a price increase.”

But now the producers had the upper hand, he said.

“Big box retailers are pushing back on manufacturers to try to encourage them to begin to do more discounting. But their bargaining power is less than pre-Covid because we still have a lot of back and forth with suppliers on freight costs, on labour costs, on deglobalisation,” Barkin said.

“It’s going to take a while for them to negotiate price increases out of the system.”

Procter & Gamble, the biggest US consumer goods manufacturer, said on its earnings call in October that “labour inflation continues throughout the supply chain and in our costs”.

Research from the Richmond Fed and Duke University showed almost 60 per cent of companies planned to raise prices this year by more than they did before 2020. “There’s a softening in the intensity and they only plan to raise prices once, not multiple times,” Barkin said. “But it’s still there.”

Barkin is watching whether consumers respond to those price increases by cutting back on purchases. If they continue to spend, he will be more reluctant to start cutting rates from their current 23-year high of between 5.25 per cent and 5.5 per cent.

The latest edition of the Fed’s Beige Book survey said shoppers were becoming more sensitive to changes in prices. That trend, the publication said, “had forced retailers to narrow their profit margins and to push back in turn on their suppliers’ efforts to raise prices”.

Grocery sector specialists cite the rise of German discount chains Aldi and Lidl as a sign of consumers’ focus on value.

Still, Barkin’s fears speak to a broader concern among global central bankers that the world has shifted to what the Bank for International Settlements has labelled a high-inflation regime, in which price rises become so pervasive that they beget more of the same.

Data show that products such as fizzy drinks, where competition and the market power of big retailers had kept prices more or less on hold, have now become susceptible to inflation.

“You had a generation trained by two decades of falling goods prices, where globalisation just kept increasing,” said Vincent Reinhart, a former Federal Reserve economist who is now at Dreyfus and Mellon. “With the pandemic, you’ve lost that innocence. And once it’s lost, then I don’t think you can easily go back.”

Jon Hauptman, founder of consultancy Price Dimensions, has noticed a shift away from a model where big producers offered credit to retailers in return for discounts.

“Historically, consumer goods companies offered trade funding to retailers in return for discounts. But that’s no longer happening to the same extent,” Hauptman said, adding that the companies were also only willing to offer discounts to specific types of shoppers. “We’re seeing more and more that the money they are spending is targeted in a laser-focused way.”

As the presidential race heats up, persistent price pressures are an increasing concern for Biden’s economics team, especially for groceries, the prices of which have risen sharply over his four-year term.

The January edition of the FT Michigan Ross poll showed that, when it came to inflation, 72 per cent of respondents cited higher food prices as having a big impact on their finances, with 51 per cent of those polled also concerned about the rise in cost of everyday necessities.

The prices of some staples, such as milk and eggs, have fallen from 2022 highs.

Retailers are also managing to regain some of their power by expanding the range of own-brand products they offer. “They’re coming out with new tiers of private brands,” Hauptman said, predicting that this would push manufacturers to provide more trade funding for discounts than they were today.

Walmart, the US’s mega-retailer, has said in recent earnings calls that it is seeing inflation returning to more normal levels. Discount chain Dollar Tree, which made headlines when it raised its prices from $1 to $1.25 in 2021, has reintroduced a $1 range on a limited number of products.

A big question is whether change will come soon enough ahead of the November to rectify the public perception that the president is not doing a good job on the US economy.

The January edition of the FT Michigan Ross poll showed that more than half of voters believe they have become worse off under Biden. More than 40 per cent of respondents see Democratic policies as one of the three main reasons why prices are still rising — the second biggest factor after large corporations, which 57 per cent of respondents believe are taking advantage of high inflation.

The US Treasury has repeatedly emphasised that wages are now rising at a faster pace than prices for the average American. But Barkin’s counterpart at the Atlanta Fed, Raphael Bostic, told the Financial Times in an interview earlier this month that he believed the soaring cost of items such as food was still weighing on the nation’s mood.

“Everybody noticed that when you went to the grocery store, the same amount of money wasn’t getting the same amount of stuff,” Bostic said.

“Now that inflation has slowed, the escalation of the crisis is not as extreme. But prices are still higher than in many instances and they were at the beginning of the pandemic and that is still weighing on folks.”

Barkin agreed that the higher cost of goods that are frequently bought was lingering in shoppers’ memories. “If there’s a dramatic rise in prices over a short period of time, people remember that.”