The Psychology of Inflation
The food is too damn high!
NBC News (“Consumers are tired of price increases. Big brands are paying attention.“):
Until recently, Brooke Benson considered herself a Panera Bread loyalist. For the past 12 years, the 40-year-old Orlando, Florida, resident said she’d make three to four trips there every week — an estimate her husband said was closer to four or five — to get her favorite soups.
But after the outpost of the restaurant chain near Benson’s home raised its price to $8.79 for the same bowl of soup that had cost $7.09 three years ago, she said she was done.
“I actually have been looking at soup at all these different places and comparing the prices,” Benson said by text. “I can get better soup in larger portions for cheaper” elsewhere, she said.
This was, of course, always the case. But she was used to getting her soup for $7.09. So, even though the price hike was in line with broader inflation—and quite likely her adjusted wages—over the past three years, the adjustment caused her to rethink her options.
Most of the rest of the report hinges on the same concept.
Panera Bread didn’t respond to a request for comment, but several big brands are now acknowledging that inflation-weary Americans are walking away from products and services that keep getting costlier.
Many companies that raised prices during the recovery from the pandemic cited higher costs for the ingredients, materials and labor needed to provide goods and services that many consumers were racing to buy. Those price hikes, exacerbated by supply chain snags in late 2021, helped push the annual inflation rate to a four-decade high of more than 9% by summer 2022. It has since fallen to 3.1%, meaning prices overall are still going up, albeit more slowly.
That has put customers in a game of chicken with companies that continue to raise prices.
McDonald’s recently vowed to focus more on affordability this year, with CEO Chris Kempczinski saying in a recent earnings call that lower-income customers were forgoing the golden arches to eat more cheaply at home.
Again, it has always been cheaper to eat at home than go to McDonald’s. I can get a pound of 80% ground beef for $3.49-$3.99, depending on the package size. You can’t get four Quarter-Pounders for that. But, again, we tend to get a price point stuck in our heads for certain items—Why, I remember when you could get a fish, fries, drink and pie all for a dollar ninety-nine!—and get annoyed when the price goes up.
As a young comic collector starting in the mid-1970s, I remember the constant price increases from the 25 cents that was the standard from 1974-1976, to 30 cents in 1977, 35 cents in 1978, 40 cents in 1979, 50 cents in 1981, 60 cents in 1982, 675 cents in 1986, and finally a dollar in 1988. I mostly lost the thread after that. They’re $3.99 now. That those hikes were roughly consistent with inflation didn’t change the fact that they seemed outrageous. Outrageous I tell you!
Regardless, customers are actually buying less of substitutable goods:
Baja Fresh and Wetzel’s Pretzels operator MTY Food Group said last week that same-store sales fell 0.9% yearly across its brands, after consumers responded to higher prices by reining in spending. CEO Eric Lefebvre said the company would be able to make only “very minimal price increases” as a result.
“We need to make sure we don’t push the customers away,” he said on an earnings call.
General Mills similarly cited “a continued challenging consumer landscape” as sales in its pet food businesses, including the Blue Buffalo brand, fell 4% on a yearly basis. The company admitted it had overestimated customers’ willingness to pay higher prices for dog treats.
“People [are] trading down to less expensive treats — if they’re still treating,” CEO Jeff Harmening told analysts in December.
Kraft Heinz, the maker of iconic mac-and-cheese and ketchup brands, reported a 7.1% decline in yearly sales, suggesting it was hitting the limit of how far it could hike prices before customers cut and run. The company raised prices by 2.5% across its product line over the course of 2023, after doing so by 14.2% the previous year. CFO Andre Maciel told analysts last week that Kraft expects to lift prices by only about 1% this year.
Home Depot said Tuesday it was planning for 2024 to be “a year of continued moderation,” as customers reduced their average spend by 1.3%. The company said shoppers are less excited about big-ticket purchases after a home-renovation frenzy early in the pandemic.
This is why I’m skeptical of the “greedflaton” argument. While I have no doubt that firms wish to extract every penny they can from the consumer—and am sure some used the excuse of broader supply chain issues and inflation as an excuse to raise prices—consumers still have options in most circumstances.
It does, of course, get more challenging in cases of monopoly or oligopoly, especially for hard-to-substitute goods. Famously, the cost of canned soft drinks went through the roof during the pandemic and haven’t come back down. And there are really only two major companies, Coke and Pepsi, in that space. Those who want their daily Diet Coke or Mountain Dew are sort of stuck. (We buy in bulk when they go on “sale” for under $5 a 12-pack.)
Walmart has been trying to lower some of its prices to cater to budget-conscious consumers, with clear results.
“We took our French bread back to $1, which had been $1 for a long time and went up as inflation hit the market,” Walmart U.S. CEO John Furner told investors Tuesday. The price had jumped to $1.47 before the cut. “We’re seeing results of that running about 40% over last year, so customers immediately responded,” Furner said.
He added that the retailer has sliced $1 off the price of rotisserie chickens as well.
That’s just shrewd business. These items are clearly loss leaders at those prices but they’re ones customers know the price of and are therefore most sensitive to changes. Presumably, they’ll mark up other products to cover the move.
Businesses’ wholesale costs for many raw materials, contracts with suppliers and other “inputs” are still elevated, with a closely watched index of those expenses recently posting its biggest increase in five months. That makes it unlikely consumers will see brands making deep price cuts across the board anytime soon, analysts say.
Even so, many companies are now more inclined to “swallow some of the cost increases” they’re shouldering, rather than pass them on to consumers completely, said John Zhang, a marketing professor at the University of Pennsylvania’s Wharton School.
That’s already eating into profits for companies that sell essential and nonessential goods and services alike. To protect them, Zhang said, many brands are expanding the range of price points they offer shoppers. That could mean promoting higher-margin premium products for wealthier customers (such as the Double Big Mac) as well as stripped-down basics for more cost-conscious ones (like ad-supported Netflix).
“If you want to maintain your image, if you want your customer to still like you, you need to offer the customer more options,” he said.
But this is just a variation on “shrinkflation.” Rather than raising prices, companies often just make their product worse—whether by offering slightly less of it in the package, adding advertising to something that was ad-free (and upcharging to remove the ads!), or crappifying the brand by offshoring production to China.
While it’s always been cheaper to eat at home, the other key consideration is at what price point people are willing to take on the task of preparation themselves. I think that’s likely different for everyone. I love to cook, and there are some things that I just don’t order when we go out to eat because it’s so lodged into my brain how much less expensive I could make it at home (pasta is a big one, unless we’re at a place that clearly makes their own). I think, for some people, we’re reaching that tipping point (meaning, they’ve finally reached the “hey, even though I hate to cook, it’s worth my effort to make this because it’s gotten so expensive”).
I think the “greedflation” argument is still valid, it’s simply taken consumers a while to fully absorb what is going on and respond to it. When inflation first started to tick up in 2021, there were plenty of companies reporting that they were “not materially affected by inflation” in their annual reports.
As consumers pull back, companies will get more creative. I’d encourage everyone to pay close attention to package size, product performance*, quality, etc. in the coming months.
*During the pandemic, my husband noticed that the brand of spread he used started to melt very differently. It turned out that because of supply chain issues, the product had changed their formula to include more water. So, while the product didn’t act differently when it was spread on bread or toast, it turned into a wet slush of water and oil when you tried to cook with it. Gross. We stopped buying it (I only use butter or olive oil when I cook. Only exception to that is if a baking recipe specifies something exact.)
Which is exactly the way the market works. Producers raise prices to the point where customers decide it might not be worth it and look elsewhere. Producers may be able to lower prices, which they initially try to do by sales or specials, but if the consumer pressure remains strong they will eventually settle on a lower price. At the very least, they stop raising prices despite the overall rate of inflation. Of course, there is hysteresis, as once customers remove a product from their “to buy” list it takes something special to get them back. This is the way capitalism works and this is the ideal application for capitalism, because no one needs Panera soup or McDonalds Quarter Pounders.
Greed enters into it only for items that are necessities and therefore the market too heavily favors producers. Healthcare, energy, roads, things such as this that have limited producers (because of scale and location) and urgent needs. It is a foolish misapplication of capitalism to allow these prices to be solely dictated by the market.
The greedflation period also took away the main thing that conservatives would say about high prices — “That thing costs more because they’re unionized.”
Of course, we already knew that owners have been intentionally raising prices while not raising wages or paying more in supplies since forever.. and blaming all number of things other than their own greed.
This was just a period of prices rising much further than could be blamed on something other than owners taking profits just because they can.
And of course, let’s don’t contemplate the equal-and-opposite legislative forces that both can and should be brought to bear against owners who raise prices too far…. Who was the last President to demand and enforce prices not increasing? Yep, Nixon, the Republican.
@Jen:
It’s very strange, this resistance to calling a spade a spade.
The market isn’t magic. It’s people making decisions. Consumer choices do not preclude or erase the existence of greed — all of the above can, and do, exist at the same time. At this point though, we’re just talking past each other, using different language to describe the same thing. To wit:
Okay, well, what this describes is greed, defined as the desire for material or monetary gain well above need. A very human thing, and not at all shocking.
The word “greed” has a too viscerally negative and personal connotation for some, so let’s substitute euphemisms like “the market” if that makes the phenomenon sound nicer, depersonalized, and more genteel. But at least we’re finally admitting these pricing decisions actually happened instead of gaslighting ourselves. Progress.
@Gavin:
Price fixing is a bridge too far, for me at least. Just spreading the word about what’s happening so consumers can adjust and boycott accordingly is enough.
Inflation is persisting in part because so many of us won’t stop spending money and rewarding corporate grasping. Americans should own the consequences of our rampant consumerism and materialism. Whatever happened to frugality and simple living as virtues?
@MarkedMan:
Without disagreeing, let me add a little nuance that matters.
Basic microeconomics teaches that the price equilibrium is where the marginal revenue of a higher price is exactly offset by lost sales due to reduced demand. Where that point is can be affected by marketing, or by new competing goods, but it is NOT affected by the cost of production. If production costs go up for everyone, how much the market is willing to pay more is determined by the elasticity of demand, which in turn depends on the availability of cheaper substitutes. Demand for food is relatively inelastic; ya gotta eat. Similarly for gasoline; most people can’t significantly reduce their consumption of gasoline in the short term. So they pay the higher price, and complain about it.
I have a lot of sympathy for low-income people trying to cope with this. I have none for the sector of the economy whose incomes have gone up even faster than inflation over the last 10 years, but whine about high prices anyway.
@DK:
You’re a smart guy and I’m not saying you are wrong, just that I’m not seeing this the way you do. Pulling a sports analogy here, the goal of an athlete is to do the best job they can. In the case of a pitcher that means trying to pitch a no-hitter. It would be antithetical to baseball if pitchers said, “Well, I’m far enough ahead so I’m going to ease off.” If I’m selling a digressionary product like McDonalds hamburgers, I try to maximize my return. There is nothing wrong with that. Greed would be if I did so by violating laws or endangering employees or customers. But if I can make more money selling big Macs for $10 than I can selling twice as many for $5, then it is totally ethical to make that decision and do so.
Once again, I exclude essentials such as healthcare, shelter, energy, etc. Letting the market set the price on those is a disaster.
@DrDaveT:
A specific item of food becomes an essential good only when a significant segment of the population is dependent on it. McDonalds hamburgers, potato chips, even eggs, are not in that category. Eggs are nice to have for breakfast, but if the price goes too high there are alternatives.
@DK: My argument is simply that greed is a constant, not a variable. “The market” isn’t another word for greed, but rather the interplay between producers and consumers. There are all manner of things that distort markets—whether they’re collusion and other ways to fix prices, temporary supply shocks, etc.—but greed is a constant. Producers will always try to maximize profits.
@MarkedMan: Yes, we’re seeing it quite differently: you’re making value judgments I did not make.
I didn’t say, “greed is wrong” or “greed is unethical.” I essentially said greed exists and greed is at play. You seem resistant to admitting this, because you view greed as a very bad thing. That’s fine. But whether greed is good, bad, or inevitable: greed still exists. The spade doesn’t stop being a spade because people are uncomfortable with the connotations they associate with spades.
Ultimately, it doesn’t matter what people call it. The point is not semantics, but that people who said all along many companies were raising prices far above offset from supply chain issues or labor costs — in order to make as much money as possible while the blame placed on Biden could be used as cover — were not just making it up.
If people want to call this “the market,” greed, ethical, unethical, wrong, not wrong…whatever. It happened.
Our understanding of the economy and how it works is baed on two things which are rarely in sync.
One is our personal situation, and the other is what everyone else is saying about it.
This is why polls consistently show that most people expect their personal financial situation to improve over the coming year, while simultaneously insisting the economy is terrible.
Bluntly, everyone thinks the economy is terrible because everyone is saying the economy is terrible.
Very few people actually “do their own research” and crunch the numbers to decide if unemployment or inflation is too high or not. We listen to the talking heads on tee vee or what the guys at work say.
And like the woman putting her dog in the microwave, it just becomes something everyone just knows is true.
This reminds me of the number of company CEOs who complain about not finding candidates for positions and then whine about having to raise offered salaries. Guys, if you can’t afford employees at market- clearing salaries, then you don’t have a business. You have an unaffordable dream.
@DK: Let’s also not forget that Nixon’s wage and price controls proved, IIRC, to be part of the problem rather than part of the solution.
@Jen:
As I understand it, “greedflation” is the idea that the high inflation itself was primarily caused by greed – specifically greedy companies, as opposed to the more obvious and defensible reasons. As a concept, I think there is very little empirical evidence to support the idea that inflation is caused by corporate or any other kind of greed.
On the debate between DK and MM, I’ll just say that human beings are inherently self-interested, and greed is just a form of self-interest. So, everyone is greedy to some extent; the difference is really one of degree and how self-interest is prioritized over other values and principles a person or organization may have.
@Andy: Yes, I am familiar with the genesis of the greedflation accusation, which is why I specifically included the link to the Guardian piece (“Revealed: top US corporations raising prices on Americans even as profits surge – A Guardian analysis uncovers how companies enriched themselves and their investors while boasting about jacking up prices”).
I don’t think that inflation was *caused* by corporate greed–there is, as you note, plenty of evidence to show that inflation hit everywhere all at once. That doesn’t mean that there weren’t some companies that decided to lean into it, and squeeze as much out of it as possible (as the Guardian article posits).
While companies are responsible to their shareholders, it does feel…unseemly…that they would try to profit well and above “normal” levels, just because they could, honestly it feels just ever so similar to price gouging. So, we’re probably viewing this from slightly different definitions of greedflation.
@DK:
Fair enough, but I’m not the only one. It’s literally one of the Seven Deadly Sins. Nonetheless, even by your definition, “defined as the desire for material or monetary gain well above need” I don’t how raising the price of Pringles falls under your definition. What is appropriate need? When is a profit well above need? Who decides?
It’s interesting that a morals-free definition of greed is essentially the one used casually in business. We say someone got greedy not when their profits were high, but when they raised prices so aggressively they lost profit.
Question: You have a car you want to sell so you can afford to buy a new one. You paid $30K five years ago and if it was a Toyota you could find a buyer at $15K today. If it was a Hyundai, you can only find a buyer at $11.5K. Given that your car is, in fact, a Toyota, you can sell it for $15K and take that extra $3.5K and buy a nicer car or one with more options, or you can sell the Toyota at the Hyundai price and buy the new car you originally anticipated. By your definition, if you elect to sell at $15K is that a greed-base decision?
And therein is the real issue. Things have reached a point that even the young college graduates are stopping and thinking. It has to be quite terrifying for those who spent years crushing any hint of students starting to think unapproved thoughts.
People spend on things like Starbucks out of habit. But once they stop and consider how much that adds up to in a month, many will adjust.
As of inflation, not even the economists are seemingly aware of the quiet change the Fed made back in 2020, they target a 2% inflation over the long term (period undefined and variable) so they are quite willing to let inflation run high after a period so below 2% inflation
–Richmond Fed, October 2023
@MarkedMan:
When the streets of America are full of homeless people and two-thirds of Americans are living paycheck-to-paycheck, while billionaires hoard almost all of the economic growth and the same rich corporate class whining ‘Nobody wants to work!” and setting records for tax avoidance are also raking in historic profits.
Hehe. Who cares, really. Or to paraphrase Hillary Clinton, what difference does it make?
The point is that recent sky high inflation included a not insignificant number of companies raising prices as high as possible not just to offset supply chain and labor costs as we were sometimes told — using blame placed on the government as a shield to avoid public backlash for their price gouging.
That sense that inflation was just inevitable and invisible seems to have reinforced continued m consumer spending. And now that the delayed backlash may be arriving, consumers seem less willing to be gouged.
That point should not get lost among convoluted and irrelevant hypotheticals by we who feel personally attacked by the word “greed” lol
@JKB: Thank you for finally including a hot link and a citation for your quote. Keep up the good work.
@DK: We will just have to disagree on this one. To me, pricing of Pringles is a strategic decision and greed doesn’t enter into it, no matter how it is defined.
@MarkedMan:
I laughed at this one, because this is a fairly recent view. Christy Mathewson’s book Pitching in a Pinch was focused on exactly the question of when to bear down and pitch your best, versus saving your arm so that you could pitch the whole game without hurting yourself.
Until about 1970, not easing off when you had a big lead was the exception.
@MarkedMan:
Agreed on chips and eggs and other luxuries. McDonalds hamburgers not so much; there are a lot of urban food deserts in the US where fast food is the only food available. If getting to a grocery store where ingredients are cheaper than Mickey D’s means an hour round trip on a bus and having to schlep the groceries home on that bus, it’s not really a viable option.
As an undergrad, I lived on lentil stew, off-brand ramen, and fast food. Lentils and ramen because that’s what I could afford to make; fast food for the convenience and social. (I’d have added eggs to that diet, except my roommates would steal them.) But it was a 20 minute hike to the shop where I could buy cheap bulk ramen and lentils; a single parent would have problems.
@Jen:
Serious question: what are “normal” levels of profit? Are they different from “as much profit as is currently possible”?
The question of price gouging doesn’t arise unless you are talking about necessities, and even then only in paternalistic societies like ours. The recent fracas over insulin prices, or the earlier one over epipens, are good examples. But nobody cares how much profit Hummer is extracting from their customers, or even Nike for that matter. And while I have occasionally run into a sole proprietor or craftsman who doesn’t raise prices to the profit-maximizing level, I have never seen any business of any size do that deliberately, short of regulatory coercion.
@DrDaveT: Oh, don’t get me wrong. Making it simpler, if a 98 mph fastball is likely to produce strikes or fieldable contact, is it “greedy” to throw 103 mph? The answer to me is that a pitcher should throw as hard as they can, once they consider how many innings they are likely to pitch, what effect it will have on their arm in the long and short term, ability of the batter to hit the ball, etc. The point is these are all tactical or strategic decisions, and greed isn’t really a factor.
(Still sad that we will be without our 103 mph closer for the entire Orioles season)
@JKB:
FTFY. (And yes, habit plays a role, but it may be important to remember that many commodities that Americans consider “essential” are, in fact, luxury goods and their wide dispersal across society is a reflection that conservatives are not being completely disingenuous when they say sh!t like “even poor Americans are richer than most people in the world.” Even so, it’s been established repeatedly that giving up your daily Starbucks doesn’t actually save anyone several th0usand dollars a year (because that purchase is being made with disposable income that usually gets transferred to another surplus-capital purchase rather than saved). We ARE truly blessed here. We’d be even more blessed if some Americans would stop using zero-sum economic theories to dictate their positions on various features of economic policy.
@DrDaveT:
You bring up a good point. I’ve lived in cities, in suburbs and in more rural areas and have noticed that in the cities and rural areas supermarkets jack up their prices across the board, because they know their customers have fewer choices. Suburbs have plenty of competition so they have frequent sales and generally lower prices. I consider this to be greedy (in the 7 deadly sins meaning) and immoral. While any given food item in the US is not an essential good (unlike, say, Rice in Vietnam), the source of all your food is, most definitely.
@DrDaveT:
Good point! And for the record, I’ve lived in areas in this greatest of all of God’s creations nation-wise where the 5 or so closest places to buy food were convenience stores and the nearest place to buy groceries was a bus ride away. (And such locations aren’t always in ghettos, either.)
@MarkedMan: Your story about the 103 mph fastball reminds me of an article a former pitchers/now sportswriter wrote about the day he discovered pitching fastballs and went from being a pitcher who had several off-speed pitches in his arsenal to being a guy with a 93 mph fastball and a torn rotator cuff.
Not a baseball fan so I can’t say for sure but my sense is that “stragety” plays a role in pitcher decision making less often than we imagine.
@MarkedMan:
My beliefs are less absolutist than that. I believe the pricing of Pringles can be a strategic decision sometimes, and greed can enter into it sometimes. I wouldn’t presume all businessowners everywhere always have same motivations, and that those motivations could never include greed, or never result in price gouging.
@MarkedMan:
Baseball suffers, among other things, from a lack of time constraints. The team batting can score as long as the inning lasts, and in principle an inning can last days. even if you’re ahead by a lot, the team batting can conceivably catch up*.
So let’s move to a sport with a fixed duration, say football. It is customary to ease up when a team is far ahead of the other, at least in the second half of the fourth quarter. It’s not uncommon to see a ball carrier step out of bounds or slide, just short of the end zone in the late stages of the game, purposefully not scoring.
*It’s really hard to talk about baseball and not make fun of it.
@Just nutha ignint cracker: I’m going to fan-out here but feel free to ignore. I think the pitcher versus batter duel is the most fraught face off in all of sports. Over a century and a half the relationship between mound and batters box has been honed to create the perfect athletic challenge: the batter must commit to swing or not swing before he can be certain of the spin, speed and path of the ball. So the batter has to know the types of pitches that an opponent can throw, the way they look coming off the hand, how the runners on base will affect that, and still has to get inside of the head of that pitcher and decide, “Fastball, cutter, slider? And where is he aiming” When you see a batter whiff in the majors it is never because they couldn’t hit such a ball. Even a 103 mph fastball could be hit by virtually every batter if they were certain it was coming and knew where it was aimed. And, of course, the same applies to the pitcher. They have to know what the batter can hit, and what they struggle with. Where they can be fooled and where they lose confidence.
@Kathy:
Hah! I feel the same way about football! Fixed duration!? Hah! But to each their own, and the more choices the better.
Also true in baseball, although it happens more organically. Up by 7? You don’t put in your star reliever, but instead look deep into your roster for someone having difficulty or a lack of experience, so as to give them innings under low pressure. And if you are down by a large amount (9?) you can actually put in an outfielder as a pitcher, so you don’t waste your bullpen. No batter takes a hard cut against an outfielder. It changes the whole strategy when you literally have to play the next day, and the next, and the next after that.
@MarkedMan:
Is it still immoral if the grocer’s costs are higher in the inner city, due to some combination of increased delivery costs, higher spoilage, higher pilferage, higher security costs, high land costs (including property taxes)? Plus higher sales tax, which is not the grocer’s fault?
@MarkedMan:
Yes, fixed duration. There is a clock and it runs out. Granted the alleged 60 minutes of play are more like 2:30-2:45 hours, not counting halftime, but clock management is an important part of the game.
@DrDaveT:
In my opinion? Clearly no.
@DrDaveT: I’ve spent decades working in communications and PR, so my thoughts on this are likely fed by considering the reputational risks of increased pricing, which are not insignificant. Brand trust is anchored by several things, one of which is value. That doesn’t mean “cheap,” it means that consumers can expect that when they purchase a product, the price they pay is a fair one. What does “fair” mean? That’s in play here.
As a PR professional, I’d argue that “hey, prices are going up everywhere, and even though our product isn’t directly impacted, let’s raise the price anyway” carries with it some reputational risk. Sure, the brand can argue that “everyone is doing it,” the question is, is it worth the risk? How much damage to trust will impact a brand? Is it worth it to eek out some additional profit? What’s the risk of backlash?
I’m reminded of the Schooner Tuna plot line in the movie Mr. Mom.
As someone married to a person responsible for everything food (including buying) for one of the largest hospitals in Florida, anyone who tells you that food inflation isn’t real as a heart attack is full of it. And its not 3%. Try 5-6%. That 3% is the general figure, excluding food and energy. And speaking of energy, do people understand the energy content of food? Grain drying, fertilizer, transportation, etc? And this type of buying isn’t smaller portions of chips in a bag. Its commodities; bulk.
Spare me the greed bullshit. Who here is telling their employer to lower their wages 5% for the good of the nation? Waiting……..
I hear Joey’s new campaign strategy is to blame corporate greed for food inflation. Couldn’t be his energy policy, or pouring useless money out of helicopters for green energy projects and pork impostering (heh) as the Inflation Reduction Act.
Joe (or should I say Barack II) has been a plain and simple disaster. Good riddance to him.