Pro Take: No Big Consumer Price Declines Are in Sight
Summary
Consumers are seeing some relief on rising prices as the Federal Reserve keeps interest rates at elevated levels and commodity prices weaken. But the inflation battle seems to be advancing only by inches.Consumers are seeing some relief on rising prices as the Federal Reserve keeps interest rates at elevated levels and commodity prices weaken. But the inflation battle seems to be advancing only by inches. Core consumer prices rose a higher-than-expected 3.9% in January from a year ago, the government reported Tuesday.
Many companies are holding the line on prices as they fork over more for wages and other expenses. Businesses also could be boosting profit margins amid lower-priced commodities. Corporate profits surged in 2023.
“Prices rise like a rocket and fall like a feather," said Mark Zandi, Moody’s Analytics chief economist.
Executives at companies across a range of industries, including at a major retailer, food manufacturer, sushi restaurant chain and toy company, have said in earnings calls in recent weeks that they noticed commodities deflation in 2023. But they are making mostly strategic consumer price cuts, if any, and may be raising prices. They don’t anticipate big help for price-weary consumers.
“Structural inflationary factors such as higher wage rates, transportation costs and other overhead items are all still supporting higher product costs," Tractor Supply Chief Financial Officer Kurt Barton told analysts Feb. 1.
Tractor Supply saw a slowdown in retail price inflation through 2023, with the fourth quarter “experiencing a net slight deflation," Barton said. Bagged livestock feed drove a good part of the retail deflation.
Salad dressings were a surprising inflation hotbed in 2022. The reason: Egg and soybean oil prices soared.
In December 2022, salad dressing prices rose 18% on a year-over-year basis, according to the consumer-price index. They have since fallen back to earth. In January, they rose only 2% on a year-over-year basis, according to Tuesday’s latest CPI reading.
Lancaster Colony is a dressings and bread maker whose products are sold at retail stores such as Walmart and through a food-service division supplying products to restaurants and institutions.
The company says its gross profit margins fell substantially with higher commodity prices and they aren’t back to what they were before the pandemic.
“Our hope is that this commodity deflation sticks. We should begin to see our retail business revert to some of the historical margins that we’ve had there," Chief Executive David Alan Ciesinski said Feb. 1.
Ciesinski added that the company had concerns over some consumer weakness in late 2023 and either didn’t increase retail prices or modestly cut prices. For example, the Ohio company pared the price of a 16-ounce bottle of Olive Garden-branded salad dressing at Walmart to $3.95 after it had floated above $4, Ciesinski said.
Food prices in grocery stores have recently stabilized. But inflation at restaurants ran at 5.1% on a year-over-year basis in January, well above the Fed’s 2% overall inflation target.
Restaurant chain Kura Sushi USA experienced 4% commodities deflation but boosted prices by 9% on a year-over-year basis for its quarter ended Nov. 30, the company said in early January.
“So with a lot of tailwinds, our pricing, the commodity deflation, the easing of labor inflation, the tailwinds have been great this past quarter and we fully expect that to continue for the remainder of the year," CFO Jeff Uttz said in the earnings call on Jan. 4.
The company had said labor inflation was running about 10% in mid-2023. Labor cost increases have subsided and the company expects to return to more normal price increases of about 3% this year, it says.
Toy company Mattel experienced significant inflation in prior years, but the trend reversed itself in 2023, with deflation producing gains in gross margins in the fourth quarter, Chief Financial Officer Anthony DiSilvestro said Feb. 7. The company owns the Barbie doll and Hot Wheels brands.
“We did see deflation in both logistics, primarily ocean freight, as well as on our resin cost," DiSilvestro said. “We increased gross margin 570 basis points in the fourth quarter and 340 basis points of that was deflation."
As for price cuts for its toys, “we will manage the situation accordingly. We don’t plan for any broad-based pricing changes in 2024," DiSilvestro said.
When it comes to prices, what goes up doesn’t necessarily fall as far. Consumers are still seeing prices well above their prepandemic levels, which may be leading to economic discontent.
Write to Bob Fernandez at bob.fernandez@wsj.com
