Inflation Risks Persist Amid Companies' Reluctance To Roll Back Prices

US faces inflation challenges as companies resist lowering prices to pre-pandemic levels, impacting consumers.

Why are US companies not reducing prices post-pandemic?

The reluctance of companies to reduce prices to pre-pandemic levels is raising concerns among US central bankers and Biden administration officials. Despite the easing of economic shocks from the pandemic, businesses continue to pass on substantial price increases to consumers. Richmond Fed President Thomas Barkin, a key figure in the US central bank's policy deliberations, is monitoring whether retailers can persuade manufacturers to offer discounts and ease pricing pressures.

The Shift In Market Power Dynamics

The balance of power has shifted from retailers to producers, as noted by Barkin. Big box retailers are struggling to negotiate discounts from manufacturers, who are still grappling with increased freight, labor costs, and the effects of deglobalisation. Procter & Gamble's acknowledgment of persistent labor inflation in its supply chain exemplifies these challenges. The Richmond Fed and Duke University research indicates that 60% of companies plan to raise prices this year, albeit less intensely than in previous years.

Richmond Fed President Thomas Barkin
Thomas Barkin, Richmond Fed President

Consumer Response And The Secondary Effects

Barkin is observing consumer reactions to price increases, which could influence his stance on adjusting interest rates, currently at a 23-year high. The Fed's Beige Book survey highlights that consumers are becoming more price-sensitive, pressuring retailers to narrow profit margins. Additionally, concerns are growing among global central bankers about a shift to a high-inflation regime, as even previously stable-priced products like fizzy drinks are now subject to inflation.

The Broader Economic And Political Landscape

Persistent price pressures pose challenges for President Biden's economics team, particularly with rising grocery prices. The FT Michigan Ross poll reflects public concern over inflation, with food prices significantly impacting finances. Retailers like Walmart and Dollar Tree are adapting, with Walmart noting a return to more normal inflation levels and Dollar Tree reintroducing a $1 range. However, public perception remains a critical issue, with more than half of voters feeling worse off under Biden's administration. Raphael Bostic of the Atlanta Fed acknowledges the ongoing impact of high food prices on the national mood, despite some easing of inflationary pressures.

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