Red-hot inflation has CEOs 'crowing' and consumers crying (sort of)

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Wednesday, February 16, 2022

Consumers ‘not ready to cry uncle’ on inflation yet

Another day, another inflationary data point that demonstrates the underlying strength of both the economy, and corporate America.

In a more logical timeline, news that wholesale prices hit an annualized rate of 10% in January, in a general environment of inexorable price pressures, would have knocked Wall Street lower. Yet for reasons the Morning Brief recently articulated, Russia-Ukraine news has become the near-term fulcrum driving market sentiment.

For that reason, Moscow’s partial withdrawal of troops put investors in a good mood, temporarily counterbalancing inflation data that has the Federal Reserve on high alert, even though the balance of risks remain skewed toward an armed conflict.

Key to understanding our current moment is that inflation, as dicey as it can be for the average citizen, can work to the benefit of big companies with sufficient pricing power that adds to their bottom line. Even Starbucks (SBUX), having doled out pricier cups of coffee with more hikes on the way, as CEO Kevin Johnson told Yahoo Finance’s Brooke DiPalma last week, hasn’t been immune to the effect.

And with an economy still expanding at an appreciable rate, there’s no telling when trickle-down inflation will stop.

“What we see is across sectors — across companies, CEOs are just crowing about how they can raise prices on consumers all while bringing in record profits,” Rakeen Mabud, Groundwork Collaborative chief economist and managing director of policy and research, told Yahoo Finance Live on Tuesday.

What that signifies is a publicly-traded behemoth like Airbnb (ABNB), which on Tuesday reported higher-than-expected fourth-quarter revenue that defied Omicron-related headwinds, is a far different animal than mom and pop shops struggling with supply and worker shortages — as well as an inability to pass along higher costs, something Yahoo Finance’s Dani Romero highlighted on Tuesday.

Taken together, the latest data point, and the market’s reaction to it, show how “producers are saying ‘don’t look to us to stop the worst inflation outbreak in decades,'” said Christopher S. Rupkey, chief economist at FWDBONDS.

“Factories are producing more inflation than ever. Producers will continue to jack up prices and pass on their higher costs until consumers cry uncle. Don’t look for that to happen anytime soon,” Rupkey wrote.

"If out-of-control price increases and soaring inflation can’t be stopped soon, this economy is going to change from the best economy in 50 years to the worst economy in 50 years fast,” he added.

Soaring prices has become a political liability, and drawn cries of “price gouging” from the more populist-minded politicians in our midst. However, at least one study questions the idea that consumers are uniformly outraged about prices, and under certain circumstances might even be amenable to paying more.

In a 2021 study, law professors Christopher Buccafusco, Daniel Hemel and Eric Talley found that generally, consumers “are more tolerant of price increases” than data suggests, and that fair prices can be situational and “highly sensitive to context.”

“For example, participants are much more tolerant of moderate price increases if they previously are asked to contemplate large price increases,” the authors wrote. “Moreover, participants are substantially more willing to accept a price increase when it is accompanied by an apology and/or a public-minded rationale.”

So, the thinking goes, it helps if Chipotle says “sorry” for hiking the cost of its guacamole (avocado prices are on a tear, don’t you know), or Purell raises the price on its disinfecting wipes — or Rite Aid slaps limits on how many you can buy. It’s situational, and mostly in the eye of the beholder.

By Javier E. David, editor at Yahoo Finance. Follow him at @Teflongeek

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