Deflation Never Happens, Except Right Now
The first salvo in the price wars came in March, when Ikea announced it was making much of its furniture cheaper after a reduction in the cost of raw materials. Then, McDonald’s announced it would slash prices on four items to $5 for a month — only for Burger King to come out with its own, more extensive ultracheap menu. Walmart, Target, and Aldi have all started to discount groceries. Coffee is well below its 2021 peak, and eggs and milk are now more affordable. Even gas prices are heading into reasonable territory ahead of Memorial Day weekend (except in California). Could it be? After we’ve been told for years that prices never come down, are things starting to actually get cheaper?
The answer is yes, though as with all things inflation, it’s not that simple. Inflation is like the kind of mutating blob you used to see in campy horror movies — usually growing, but always changing form. Rising prices normally result in higher wages — at least in the U.S., where deflation, a period of falling prices, rarely occurs. An era of falling prices may sound pretty great, but economists see it as a nefarious threat to stability, since people put off buying homes and other big purchases because they know it will be cheaper later — a disincentive spiral that’s hard to escape. This time around, wages have indeed risen a touch faster than the inflation rate, putting more money in people’s bank accounts, and making it seem like, eventually, all the goods and services that people normally buy would start to feel affordable again.
Given all that, why would giants like Walmart and McDonald’s lower prices? After all, these are publicly traded companies that answer to shareholders who want to see fatter profit margins, not goodwill campaigns. They also make hundreds of billions of dollars in annual revenue, giving them a financial cushion to keep prices higher for longer. The White House has pressured companies to reverse course, and the Biden administration is happy to take credit as they’ve done so. But to Quincy Krosby, chief global strategist at LPL Financial, the primary reason for companies’ change of heart is that customers have finally hit their limit. “Consumers have rebelled to some degree by going to offer off-brand names. That’s typically the first thing that consumers do,” she said.
When consumers start to take their money elsewhere, it disrupts a company’s financial equilibrium. Take, for instance, the cost of storage. Customers don’t usually think about the logistics involved in ordering and keeping the goods that flow into a giant retailer. But the longer something sits unbought on a shelf, or in a warehouse, the more expensive it is for the company. When you take into account that warehousing costs rose by 20 percent last year to the highest on record, according to data from real-estate firm Colliers, it starts to make the logic of lower prices easier to grasp: It’s not so much that retailers are listening to customers as they’re trying to save money elsewhere on their balance sheets. “That’s really the key here. The stores are lowering prices but still are left with too much in terms of leftover food, leftover clothing,” Krosby said.
Of course, once a customer is in the store, the goal is to get them to buy as many expensive goods as possible. This is where inflation’s bloblike nature comes in. Someone might realize immediately that they’re saving a dollar or two on dairy and eggs, but do they know how much other prices have gone up? Lots of items are, in fact, more expensive than they were a year ago. For instance, Walmart can still lure men into buying a new sweater, which costs 7.2 percent more than a year ago. McDonald’s can upsell McFlurries. And Ikea’s prices are still higher than they were before the pandemic.
And forget retail: The inflation blob right now is largely powered by the rising cost of rent, which is up about 6 percent, and car insurance, which has soared more than 22 percent. Grocery prices have essentially been flat since January, so the price cuts are likely to have a modest effect on the overall inflation rate and are unlikely to trigger some downward spiral in the broader economy. The Federal Reserve is looking increasingly unlikely to lower interest rates this summer, which would signal that prices are finally on stable footing and borrowing costs would be starting to slow. It’s no wonder that less than a quarter of Americans still think the economy is in good shape.
Still, inflation has been raging for so long now that when prices go down, it feels like some sort of hallucinatory aberration. I recently bought an iced coffee from a neighborhood café for $4, about a dollar cheaper than it was last year, and was left with such an uncanny feeling that I was sure my own memory was wrong. (I checked my credit-card statements; I was right.) For most people, food and gas hold outsize importance in how they judge inflation, since these are the purchases that people make day in and day out. An actual decline in prices could mean that the economy — at least, a big part of it — is finally starting to cool. “Consumers are not going back if they think that they’re going to hike prices,” Krosby said.