Inflation is cooling, but prices on many items are going to stay high for months

Inflation may cool down. But, for most Americans, the price of a cup of coffee or a bag of groceries hasn’t budged.

The big question in the coming months is whether consumers will start feeling the relief.

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Over the past few months, several key factors that Inflation reached a four-decade high It’s starting to fade. Shipping cost is reduced. Cotton, beef and other commodities have become cheaper. and shopkeeper deeply discounted online and in malls during the holiday season, as retailers Tried to clear through excess inventory. consumer prices fell 0.1% in December Compared to last month, according to the Labor Department. marked it biggest monthly decline in about three years.

But cheaper freight and commodity costs won’t pass down to consumers immediately, partly because of supplier contracts that set prices months in advance.

prices are still high where they were a year ago. The headline consumer price index, which measures the cost of a variety of goods and services, rose 6.5% through December, according to Labor Department data. some price increases Eye catching are: cost of large grade A eggs have more than doubledWhile the price tags of cereals and bakery products have gone up by 16.1%.

“There are some prices, some goods whose prices are falling,” said Mark Zandi, chief economist at Moody’s Analytics. “But broadly speaking, prices are not falling. It’s just that the rate of increase is slowing.”

Retailers, restaurants, airlines and other companies are deciding whether to pass on price cuts or impress investors with better profit margins. Consumers are getting pickier about spending. And economists are pondering whether the US will enter a recession this year.

Now, those factors are starting to reverse. As Americans feel the pinch of inflation and spend on other priorities such as travel, trips and eating out, He has bought less stuff.

Freight costs and container costs are reduced, driving down prices throughout the rest of the supply chain. Long-distance truckload costs were up 4% in December from a year ago, according to Labor Department data, but down about 8% from March’s record high.

The price of a 40-foot shipping container is down 80% from a peak of $10,377 in September 2021 to $2,079 as of mid-January, according to Drewry’s World Container Index, a supply chain advisory firm. But it is still higher than pre-pandemic rates.

Food items have become cheaper. According to the US Department of Agriculture, beef wholesale prices declined 15.6% in November from a year earlier, but were still historically high. Coffee beans fell 19.7% over the same time period, according to the International Coffee Organization’s overall global value. According to Labor Department data, the price of raw cotton has declined by 23.8 per cent.

However, to protect against unexpected price increases, many companies have long-term contracts that determine the prices they will pay to operate their business months in advance, from purchasing materials to transporting goods around the world. .

For example, Chuy’s Tex Mex Fajita beef prices are lower than the chain paid last year, and it plans to lock in ground beef prices during the third quarter as well. But diners will still pay higher menu prices than last year.

Chuy’s plans to raise prices by about 3% to 3.5% in February, although it has no plans to raise prices later this year due to its conservative pricing strategy. The chain’s prices are up about 7% compared to the year-ago period, following the price hike of the overall restaurant industry.

Similarly, coffee drinkers aren’t likely to see a drop in prices for their lattes and cold brews this year. Dutch Brothers. coffee CEO Joth Ricci told CNBC that most coffee businesses hedge their prices six to 12 months in advance. He predicts that the coffee chain’s pricing could stabilize by mid-2023 and as late as 2024.

Supplier contracts are not the only reason for price stability. Labor has become more expensive for businesses that need lots of workers but have struggled to find them. Moody’s Zandi said restaurants, salons, hotels and doctors’ offices will still reckon with the cost of higher wages.

The shortage of airplane pilots is one of the factors that is likely to keep airfares more expensive this year. The price of airline tickets has declined in recent months, according to the most recent federal data, but is still about 30% higher than last year.

However, Zandi said, if the job market remains strong, inflation subsides and wages rise, Americans may be better able to manage higher prices for airfare and other goods.

Annual hourly earnings increased by 4.6% In the past year, according to the Bureau of Labor Statistics – the growth of the Consumer Price Index in December has not been as high.

Yet in some categories, the softening in demand has translated into price relief. According to December data from the Labor Department, the price of many hot pandemic items including TVs, computers, sporting goods and major appliances declined.

At least two grocery officers, hooks CEO Rodney McMullen and Sprouts Farmers Market CEO Jack Sinclair said he does not expect food prices to drop anytime soon.

“The growth is starting to slow down a bit,” McMullen said. “It doesn’t mean you’re going to start seeing deflation. We would expect to see inflation in the first half of the year. The second half of the year will be meaningfully lower.”

He said there are exceptions. For example, as the avian flu outbreak subsides, eggs are likely to become cheaper.

Over the past two years, consumer packaged goods companies have raised prices of items on Kroger’s shelves or reduced packaging sizes, a practice known as “shrinkage”. McMullen said no one has gone back to reducing prices or raising discount levels as much as a year ago. Some are keeping aggressive prices as they play catch-up after margins eroded earlier in the pandemic or they sacrifice volume for profits, he said.

On Procter & GambleFor example, officer Plan to increase the price again in February, Prices for P&G’s consumer staples like Pampers diapers and Bounty paper towels climbed 10% over the past year, while demand declined 6% in its latest quarter.

In other cases, companies are still dealing with the factors that contributed to inflation. For example, farmers are raising cows, but less than before the pandemic, and grain and corn are in short supply as the war in Ukraine continues, according to McMullen.

“If before you were spending $80 and now you’re spending $90 [on groceries]I think you’re going to spend $90 for a while,” he said. “I don’t think it’s going to go back to $80.”

Utz Brands CEO Dylan Lysett echoed that sentiment in August, telling investors that even when costs go down, inventory prices typically don’t fall.

“We don’t take something that was $1, move it to $1.10 and then a year or two later, move it to $1,” he said.

Instead, food companies like Utz typically offer faster and more frequent discounts to customers as costs decline, according to Lissette, who was once in charge of pricing Utz’s pretzels and kettle chips.

In the next few years, companies may reverse “shrinkage” packaging changes, resulting in cheaper snacks on a per-ounce basis. Lysette said that two or three years after that, buyers could see the introduction of new value pack sizes.

but Retailers may be able to speed up that timeline, They may use their own, low-cost private brands, such as peanut butter, cereal, and laundry detergent that are similar to well-known national brands.

Kroger last rolled out Smart Way, a new private brand featuring more than 100 items like loaves, canned vegetables and other staples at their lowest price points ever.

McMullen said the grocer is already planning to launch the private label, but the launch was delayed by about six to nine months due to buyer interest amid inflation. And that said, if a national brand loses market share, it’s more likely to go aggressive on discounting — or even permanently lowering the price.

Moody’s economist Zandi said customers may be frustrated, but they are not powerless. By choosing competing brands or items on promotion, they can send a message.

“Businesses respond to shoppers,” he said. “If consumers are price-conscious, price-sensitive, it will go a long way in preventing businessmen from raising prices and perhaps even offering discounts.”

– CNBC leslie josephs contributed to this story.