SUMMARY:
- Consumer spending has been a major reason why inflation is prevalent.
- But elevated levels of spending are causing shortages within the supply chain slowing down the production of goods while pushing up prices.
- Americans are not paying elevated prices and are instead saving more and paying down debt.
- Brands/products that raise prices are looking at alienating customers.
According to Reuters “U.S. consumer spending paused in May as shortages hurt motor vehicle purchases, but the supply constraints and increased demand for services helped to lift prices, with the Federal Reserve’s main inflation measure rising by the most in 29 years”.
Driving the increased costs is spending on goods. Spending on services rose 0.7%, led by recreation, restaurants, hotels, and housing and utilities. Spending on goods fell 1.3%, with outlays of long-lasting goods like motor vehicles tumbling 2.8%. Goods spending surged as the pandemic confined people to their homes.
“While we foresee increased inflation stickiness, with core PCE inflation hovering around 3.0% in the second half (of the year), we don’t foresee runaway inflation,”
Lydia Boussour, lead U.S. economist at Oxford Economics in New York.
Despite this data the media would have us believe that inflation is out of control. Bullshit!
I’ve had several clients, who raised prices, tell me that it’s affecting sales. A CPG company that sells single-serving coffee products sales were down almost 6% after it raised prices in April. A company that sells streaming services told me sales are down double-digits after raising prices 12% for most customers.
On the Auto Blog, the author said that car dealers who have tacked on destination charges, sometimes as much as $10,000, are seeing possible customers flee. In fact, many online shopping tools are listing where consumers can still get good deals while another even said: “don’t buy a new car.”
Most brands will pay a huge price for raising prices rather than trying to remove costs from their supply chains. Research has shown that consumers negatively perceive higher brand prices and feel that they are trying to take advantage of increased spending.
Obviously, some brands need to raise prices to stay afloat, but their number is small. This is about profits and Wall Street and nothing else for most.
Once again, the media is trying to scare us with headlines that lead to clicks. Consumers are sitting on a lot of money right now, but they’re not going to spend it on higher prices items unless they really need to.
