Estimated read time: 5-6 minutes
WASHINGTON — The great inflation spike of the past three years is nearly spent — and economists credit American consumers for helping slay it.
Some of America's largest companies say their customers are increasingly seeking cheaper alternative products and services, searching for bargains or just avoiding items they deem too expensive. Consumers aren't cutting back enough to cause an economic downturn. Rather, economists say, they appear to be returning to pre-pandemic norms, when most companies felt they couldn't raise prices very much without losing business.
"While – is down, prices are still high, and I think consumers have gotten to the point where they're just not accepting it," Tom Barkin, president of the Federal Reserve Bank of Richmond, said last week at a conference of business economists. "And that's what you want: The solution to high prices is high prices."
A more price-sensitive consumer helps explain why inflation has appeared to be steadily falling toward the Federal Reserve's 2% target, ending a period of painfully high prices that strained many people's budgets and darkened their outlooks on the economy. It also assumed a central place in the presidential election, with inflation leading many Americans to turn sour on the Biden-Harris administration's handling of the economy.
The reluctance of consumers to keep paying more has forced companies to slow their price increases — or even to cut them. The result is a cooling of inflation pressures.
On Monday, the Federal Reserve Bank of New York reported that Americans' expectations of how much they'll spend in the next 12 months has declined — and so has their outlook for inflation. Consumers expect their spending to grow 4.9% in the coming year, according to a survey by the New York Fed. That is the lowest such reading since April 2021, when inflation was beginning to surge.
They expect inflation to average just 2.3% over the next three years, the survey found, the lowest such figure since the survey began in 2013. Consumer expectations for inflation can be self-fulfilling: When households expect low inflation, they tend to delay some purchases in the expectation that prices won't rise much in the near future — and might even decline in some cases. This trend can keep price pressures down.
Other factors have also helped tame inflation, including the healing of supply chains, which has boosted the availability of cars, trucks, meats and furniture, among other items, and the high interest rates engineered by the Fed, which slowed sales of homes, cars and appliances and other interest rate-sensitive purchases.
On Thursday, the government will report last month's retail sales, which are expected to have climbed a decent 0.3% from June. Such a gain would suggest that while Americans have become vigilant about their money, they are still willing to spend.
Most economists say consumers are still spending enough to sustain the economy consistently. Barkin said most of the businesses in his district — which covers Virginia, West Virginia, Maryland and North and South Carolina — report that demand remains solid, at least at the right price.
"The way I'd put it is, consumers are still spending, but they're choosing," Barkin said.
'The cure for high prices'
In a speech a couple of weeks ago, Jared Bernstein, who leads the Biden administration's Council of Economic Advisers, mentioned consumer caution as a reason why inflation is nearing the end of a "roundtrip" back to the Fed's 2% target level.
Emerging from the pandemic, Bernstein noted, consumers were flush with cash after receiving several rounds of stimulus checks and having slashed their spending on in-person services. Their improved finances "gave certain firms the ability to flex a pricing power that was much less prevalent pre-pandemic." After COVID, consumers were "less responsive to price increases," Bernstein said.
As a result, "the old adage that the cure for high prices is high prices (was) temporarily disengaged," Bernstein said.
So some companies raised prices even more than was needed to cover their higher input costs, thereby boosting their profits. Limited competition in some industries, Bernstein added, made it easier for companies to charge more.
Barkin noted that before the pandemic, inflation remained low as online shopping, which makes price comparisons easy, became increasingly prevalent. Major retailers also held down costs, and increased U.S. oil production brought down gas prices.
"A price increase was so rare," Barkin said, "that if someone came to you with a 5% or 10% price increase, you almost just threw them out, like, 'How could you possibly do it?' "
That changed in 2021.
'They don't like it that much'
"There are labor shortages, Barkin said. "Supply chain shortages. And the price increases are coming to you from everywhere. Your gardener is raising your prices, and you don't have the capacity to do anything other than accept them."
The economist Isabella Weber at the University of Massachusetts, Amherst, dubbed this phenomenon "sellers' inflation" in 2023. In an influential paper, she wrote that "publicly reported supply chain bottlenecks" can "create legitimacy for price hikes" and "create acceptance on the part of consumers to pay higher prices."
Consumers are no longer so accepting, Barkin said.
"People have a little bit more time to stop and say, 'How do I feel about paying $9.89 for a 12-pack of Diet Coke when I used to pay $5.99?' They don't like it that much, and so people are making choices."
Barkin said he expects this trend to continue to slow price increases and cool inflation.
"I'm actually pretty optimistic that over the next few months, we're going to see good readings on the inflation side," he said. "All the elements of inflation seem to be settling down."
