Consumers are increasingly pushing back against price increases — 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 still average about 19% above pre-pandemic levels, consumers are fighting back. In supermarkets, they are shifting from branded items to private label items, switching to discount stores or simply buying fewer items such as snacks or gourmet dishes.

More Americans are also buying used cars instead of new ones, forcing some dealers to once again offer discounts on new cars. But growing consumer resistance to what critics condemn as price gouging is most evident in food and consumer goods such as paper towels and napkins.

In recent months, consumer backlash has led major food companies to respond by sharply slowing their price increases from the peaks of the past three years. This does not mean that food prices will return to the levels of a few years ago, although prices for some products, including eggs, apples and milk, are below their peaks. But the milder food price increases should help further cool overall inflation, which has fallen sharply from a peak of 9.1% in 2022 to 3.1%.

Public frustration over prices has become a central theme in President Joe Biden’s bid for re-election. Polls show that despite the dramatic drop in inflation, many consumers are unhappy that prices remain so much higher than they were before inflation started to accelerate in 2021.

Biden has echoed criticism from many left-leaning economists that companies have raised prices more than necessary to cover their own higher costs, allowing them to boost profits. The White House has also attacked “shrinkflation,” in which a company, rather than increasing the price of a product, instead reduces the quantity in the package. In a video released on Super Bowl Sunday, Biden denounced the shrinkflation as a “ripoff.”

According to many economists, consumer resistance to high prices indicates that inflation should decline further. That would make this wave of inflation markedly different from the debilitating price spikes of the 1970s and early 1980s, which took longer to overcome. When high inflation persists, consumers often develop an inflationary psychology: Ever-rising prices cause them to accelerate their purchases before costs rise further, a trend that can itself perpetuate inflation.

“That was the fear – that everyone would tolerate higher prices,” said Gregory Daco, chief economist at consultancy EY, noting that did not happen. “I don’t think we have entered a regime of high inflation.”

Instead, this time many consumers have responded like Stuart Dryden, a commercial underwriter at a bank who lives in Arlington, Virginia. During a recent visit to his regular grocery store, Dryden, 37, pointed out the large price differences between Kraft Heinz-branded products and their store-label competitors, which he now favors.

For example, Dryden likes cream cheese and bagels. A 12-ounce tub of Kraft’s Philadelphia cream cheese costs $6.69. The store brand, he noted, costs just $3.19.

A 24-count package of Kraft cheese costs $7.69; the store label, $2.99. And a 32-ounce bottle of Heinz ketchup costs $6.29, while the alternative costs just $1.69. Similar gaps existed with mac-and-cheese and shredded cheese products.

“Just those five products together cost almost $30,” Dryden said. The alternatives were less than half that, he calculated, amounting to about $13.

“I’ve tried private label options, and the quality is the same and it’s almost a no-brainer to switch from the products I used to buy a lot of to just the private label,” Dryden said.

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

“We are committed to finding efficiencies in our factories and other parts of our business to offset and mitigate further 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 former apartment was next to a relatively expensive supermarket, Whole Foods. Now he shops at nearby Amazon Fresh and visits discount store Aldi every few weeks.

Samuel Rines, investment strategist at Corbu, says PepsiCo, Kimberly-Clark, Procter & Gamble and many other consumer food and packaged goods companies took advantage of the increase in input costs due to supply chain disruptions and Russia’s invasion of Ukraine to dramatically raise their prices – and boost their profits – in 2021 and 2022.

A contributing factor was that millions of Americans enjoyed solid wage increases and received stimulus checks and other government assistance, making it easier for them to afford the higher prices.

Still, some labeled the phenomenon “greed inflation.” And in a March 2023 research paper, University of Massachusetts, Amherst economist Isabella Weber called it “seller inflation.”

But early late last year, many of the same companies discovered that the strategy was no longer working. Most consumers have long since spent the savings they built up during the pandemic.

Lower-income consumers in particular are incurring credit card debt and falling behind on their payments. Americans generally spend more cautiously. Daco notes that overall sales rose just 4% during the holiday shopping season – and that most of it reflected higher prices rather than consumers actually buying more things.

As an example, Rines points to Unilever, which makes Hellman’s mayonnaise, among other things, Ben & Jerry’s ice cream and Dove soaps. Unilever increased its prices by an average of 13.3% across all its brands in 2022. Sales volume fell by 3.6% that year. In response, the country raised prices by just 2.8% last year; turnover increased by 1.8%.

“We are starting to see that consumers are no longer willing to accept the higher prices,” Rines said. “So companies started to become a little more skeptical about their ability to let price alone drive their revenues. They had to bring those volumes back, and the consumer wasn’t responding in a way that they were happy with.”

Unilever itself recently attributed its poor sales performance in Europe to ‘private label loss sharing’.

Other companies have noticed too. After seeing sales declines in the final three months of last year, PepsiCo executives said they would curb price increases this year and focus more on boosting sales.

“In 2024 we will see… normalization of costs, normalization of inflation,” CEO Ramon Laguarta said. “So we see everything going back to our long-term price trends.

Jeffrey Harmening, CEO of General Mills, which makes Cheerios, Chex Cereal, Progresso soups and dozens of other brands, has acknowledged that his customers are increasingly looking for bargains.

And McDonald’s executives have said consumers with incomes under $45,000 are visiting fewer and spending less when they do visit, and say the company plans to highlight its cheaper items.

“Consumers are more wary (and tired) when it comes to pricing, and we will be consumer-led in our pricing decisions,” Ian Borden, the company’s chief financial officer, told investors.

Officials at the Federal Reserve, the nation’s top inflation-fighting agency, have cited consumers’ growing reluctance to pay high prices as a key reason why they expect inflation to steadily fall back toward the 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 rate-setting committee, said last week. “Consumers don’t want to buy unless they see a 10% discount. … This is a serious improvement in the role consumers play in curbing inflation.”

Research from the Fed’s regional banks found that companies across all sectors expect smaller price increases this year. The New York Fed says companies in its region plan to raise prices by an average of about 3% this year, up from about 5% in 2023 and as much as 7% to 9% in 2022.

Such trends suggest that companies were well on their way to slowing their price increases before Biden’s latest attacks on price gouging.

Claudia Sahm, founder of SAHM Consulting and former Fed economist, said “consumers are more powerful than President Biden.”