The ability of companies to raise prices without crushing demand may be petering out.
Why it matters: Shoppers have splurged in the face of rising prices for the last three years. Now, there are early signs the spending era is coming to an end, forcing executives to limit price hikes to maintain sales.
- The evidence of newfound price sensitivity is still mostly anecdata — chatter from corporate earnings calls and anecdotes collected in the Federal Reserve's Beige Book, for example.
- But those reports have become notably more widespread in the last couple of months, and align with indicators showing more households are falling behind on credit card and auto loan payments.
- It comes as pandemic-era savings are increasingly depleted and nominal wage gains have receded from 2022 highs.
What they're saying: "Consumers were notoriously price-sensitive before the pandemic, and then that melted away," Julia Coronado, founder of research firm MacroPolicy Perspectives, tells Axios.
- That came, at least in part, as an effect of the pandemic lockdown. Consumers couldn't spend on most services, so they were willing to splurge on goods — supported by historic fiscal support, Coronado says.
- "Now they are spending on the full range of goods and services and spending out of their hard-earned labor income — and prices for goods, in particular, are a lot higher, so they are back to bargain hunting," Coronado says.
Zoom in: Executives at the Container Store, a home retailer known for its storage bins and organization products, acknowledge "increased price sensitivity" and note more discounts ahead: "We see opportunities to pass savings on to our customers on certain items as we benefit from decreased costs in raw materials and freight," the chain's CEO told analysts last month.
- Sotherly Hotels, an owner of hotels in the South, said there was a "cooling-off" in demand. "We're starting to see some pricing sensitivity from those leisure consumers — that's just the nuts and bolts of it," a top executive said on an earnings call.
- Last week's release of the Beige Book, which contains economic observations from businesses, showed 8 out of the 12 Fed regions reported anecdotes of a more choosy consumer. In the areas served by the San Francisco Fed, retailers reported "limited ability to pass higher costs onto consumers."
- A restaurant and hotel owner in Montana said it was holding off on price increases: "At some point, they will say, 'I am not paying $20 for a hamburger.'"
Price-sensitive consumers have prompted a pre-pandemic style "value war" of sorts among the nation's fast food giants, some of which have noted lower foot traffic in the wake of higher prices.
- McDonald's will launch a $5 value meal later this month. Burger King last week said it will have a similar offering. Wendy's will have a $3 breakfast combo.
The bottom line: If something can't go on forever, it won't — and corporate America's ability to squeeze more money out of stretched consumers may be that something.
