Michael Brey, president of Hobby Works, is responding to customer fatigue over price hikes by stocking affordable products that are likely to sell. The pandemic-induced price surges for items like train sets, remote-controlled cars, and drones are behind them, as consumers have reached their limit on spending. Brey emphasizes investing in smaller, entry-level products that are more budget-friendly in today's economic climate.
Across the U.S., entrepreneurs like Brey are feeling the strain of limited pricing power, which may help curb inflation. Inflation has significantly decreased from its peak two years ago, potentially allowing Federal Reserve officials to continue easing interest rates, despite less optimistic forthcoming inflation data.
Sarah House, a senior economist at Wells Fargo, notes that businesses' difficulty in passing costs onto consumers indicates the Federal Reserve's tightening policies are effectively reducing inflation. This trend is paramount as the Fed aims to complete its battle against inflation.
After a significant interest rate cut in September marking the start of a relaxation cycle, unexpected inflation data paired with accelerated hiring have raised speculations of a potential pause in rate cuts at upcoming Fed meetings. Nevertheless, policymakers largely downplayed this possibility, citing business feedback on weakened pricing power.
Federal Reserve officials, including Richmond Fed President Barkin and San Francisco Fed President Daly, acknowledge that consumers are increasingly cost-conscious, opting for store brands over name brands. Barkin points out that more promotions, discounts, and channel switches illustrate how high prices eventually correct as consumers explore alternatives.
Research from the San Francisco Fed reveals that extra savings accumulated by Americans during the pandemic's start have dwindled by March 2024. Meanwhile, New York Fed data shows a rise in credit card delinquencies, amid slowing hiring and cooling wage growth, prompting consumers to be more selective with their purchases.
A survey by the National Federation of Independent Business reports that net 25% of small businesses plan to increase prices over the next three months, aligning this metric with pre-pandemic levels, down from 54% in late 2021.
Companies like Mondelez International (MDLZ, Financial) are cautiously adjusting prices, ensuring they closely monitor consumer reactions. Wells Fargo's House points out that narrowing profit margins signal weakened pricing power, despite margins still being significantly higher than pre-pandemic levels in the retail and wholesale sectors.
At Hobby Works, Brey observes a shift in customer tolerance for price increases. Customers are unwilling to pay more than they deem reasonable, resulting in declining sales in some store sections. In response, Brey is stocking more affordable alternatives.
Despite some challenges, consumer resilience remains. The Federal Reserve Bank of Atlanta's model shows better-than-expected retail sales in September, forecasting strong quarterly economic growth.
