The ‘Unorthodox’ American Response to Inflation – Differences with Europe and Developing Countries

By Lauren Debter and Chloe Sorvino

These days, Jordan White is constantly replacing price tags on his family of six Kansas grocery stores. Among the product group for which he makes the changes for this month are those of Quaker Oats. The increases are significant enough to “hurt” consumers: Oats have risen by 25%, cereal bars by 21% and cereals by 14%. His customers, paradoxically, are not particularly bothered.

“Of course you have some customers who are unhappy with the price of meat or other products,” said White, 40, head of White’s Foodliner, which was started by his grandfather in 1953. “But in general, they know they do not. “They can do absolutely nothing about it.”

Inflation, which is at its 40-year high, has not yet made Americans turn to cheaper brands or stop spending to such an extent that it worries corporate boards.

American consumers seem to have overcome the stages of grief, which include anger and denial, and have come to “acceptance” in larger percentages than one would expect, including executives behind the country’s biggest brands. There is also an economic term for this phenomenon: elasticity, which reflects how much demand for a product falls when prices rise.

“Demand elasticity was surprisingly low,” said Kevin Grundy, an analyst at Jefferies Group. “So far, so good.”

Prices in the US are skyrocketing for all goods, from gasoline to groceries and cleaning supplies. Consumer giants such as Unilever, Procter & Gamble and Clorox have pushed up prices and curtailed promotions in a bid to offset inflation and protect their own profit margins as they struggle with double-digit price increases. materials such as corn, wheat and soybeans, as well as the increased cost of packaging, transport and labor.

Have buyers revolted? No. When P&G raised prices last year on products to which consumers are usually very sensitive to growth, the company was surprised to see that the elasticity figures were 20% to 30% lower than the historical data showed.

“We have seen a better response from consumers,” said Andre Schulten, chief financial officer of P&G, which produces Gillette razors, Dawn dish soap and NyQuil cold medicine, in a January release. Others reiterated the same finding. “Prices are rigid and elasticity is better than we originally expected,” said Barry Bruno, head of marketing at Church & Dwight, which makes Trojan condoms, Arm & Hammer laundry detergent and Vitafusion vitamins.

As Beth Ann Bovino, chief economist at Standard & Poor’s Ratings Services in the US, points out, it’s not that buyers are happy with higher prices. It is that they have accepted the situation. Consumer confidence has fallen to a decade low and “this is the shock of store prices,” he said.

Consumers have been hearing about inflation and the supply chain for months, which may alleviate their surprise when they see higher prices in the store. “I think this has gotten into consumers so hard that it is almost to be expected,” White said.

When it comes to price increases, it helps to keep company, said Noel Wallace, CEO of Colgate-Palmolive, which makes Colgate toothpaste and Speed ​​Stick deodorant. “You do not see a competitor moving, you see the class moving,” Wallace said. “We are very pleased with the acceptance of pricing throughout North America.”

This puts the American consumer on the opposite end of the spectrum from consumers in developing countries, even in Europe, where companies have said they face more resistance when prices rise.

Unilever described the pricing environment in Europe as “difficult”, especially in France, noting that its price increases on the continent last year were “relatively limited” despite high levels of inflation.

Pepsi applies only two-thirds to three-quarters of its price increases in developing countries, where it has “the variable that needs to take into account price affordability and consumer reaction to it,” said Hugh Johnston, chief financial officer. of the company, when updating its profits this month.

American consumers have benefited from checks, unemployment benefits and other government programs during the pandemic. Combined with lower travel and leisure spending, savings averaged 12% last year, up from 7.6% in 2019. “We provide a huge amount of liquidity to Americans,” said Paul Chiou, a professor of finance at Northeastern University. .

However, as these benefits become smaller and smaller, consumers are now struggling to make ends meet with their wages. Wages have risen after years of steady growth, but inflation has outpaced those gains. Adjusting to rising cost of living, wages have fallen by 1.3% in the last 12 months.

The consumer price index is also rising faster than the producer price index. Manufacturers are “using higher inflation to drive up prices aggressively in all industries,” said Mark Zandi, Moody’s chief economist.

But there are other increases in the consumer price index. The companies will continue the planned price increases in the coming months and leave open the possibility of further increases later this year.

“We believe pricing is a muscle we will continue to build as we anticipate a prolonged inflationary environment,” said Bruno of Church & Dwight, which has already raised prices on 80% of its products, such as laundry detergents and sand. for cats.

Clorox will increase prices to 85% of its products, with many of them coming into force this year. It has not ruled out further increases.