Inflation Returns in Grocery Costs and Consumer Prices
(Bloomberg) -- The U.S. economy just received the strongest sign yet that cost pressures facing companies are about to be passed on to consumers, and at a rate that the economy hasn’t seen in years.
In an earnings conference call last week, a little-known private label food company told investors and analysts that it had little choice other than to pass on its rising freight and commodity costs in the form of higher prices. It’s a warning that the relatively obscure hints of inflation are about to become obvious — at the grocery store.
Consumers will be the next to feel the pinch, but they are not primarily going to cut back on staples. It’s discretionary companies like Apple and Netflix that ought to worry.
That maker of store-brand grocery items, TreeHouse Foods Inc., is a $2 billion company with over $6 billion per year in revenue. Like many consumer staples companies, its stock has been weak, falling over 50 percent over the past year because of disappointing earnings results brought about in part by higher freight and commodity costs in recent months. That’s what made the change of tone on pricing so noteworthy.
Makers of consumer packaged goods have been dogged by concerns that they’re unable to raise prices, and because their input costs have been rising, their profits and stock prices have suffered as a result.
There’s a collective-action problem here. One company might avoid raising prices out of fear that its competitor would undercut by keeping prices low. In particular, a branded product that’s already more expensive than its private-label equivalent is afraid of raising prices.
Analysts on the TreeHouse earnings call were understandably intrigued to hear that the private-label options were about to be more expensive. The president and CEO, Steven Oakland, defended the decision, saying: “Our margins are our margins, and so passing commodities on, I think is a reasonable conversation.”
This is likely the start of “breaking the seal” and allowing the whole sector to raise prices now that the store brands are raising theirs. And yet, people are most likely going to end up eating more or less the same as they did before the price increases. The cost cutting will happen elsewhere in American households’ budgets.
If $500 a year comes out of a household budget because, say, gasoline and food costs rise, that leaves $500 less of spending power for everything else. Will people put off upgrading their smartphone for an extra few months? Will they put off buying an automobile or home appliance for an extra few months? Will they cancel their Netflix or Spotify subscription?
As there is less and less doubt that an uptick in inflation is coming, these are the sorts of questions facing investors. Will wages rise along with inflation, in that ideal positive-feedback loop? Or will Americans have to cut back on something?
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