Ignore 'hysterical people' — inflation is not here to stay, economist says
Elliot Smith 19 hrs ago
U.S. CPI inflation came in at an annual 6.2% in October, its steepest climb for more than 30 years.
The persistent high inflation and continued pressures such as supply chain bottlenecks have led many economists to question the Federal Reserve's long-held view that the spike will be "transitory."
A breakdown of the latest U.S. data indicates that inflation is confined to certain sectors and will not pose a threat to the recovery, according to Carl Weinberg, chief economist at High Frequency Economics.
U.S. CPI inflation came in at an annual 6.2% in October, its steepest climb for more than 30 years.
Energy, shelter and vehicle costs led the gains, which more than wiped out the wage increases that workers received for the month.
The persistent high inflation and continuation of pressures such as supply chain bottlenecks have led many economists to question the Federal Reserve's long-held view that the spike will be "transitory."
However, stronger-than-expected October retail sales and industrial production figures this week have indicated that the broader economic recovery may well be on track, even as inflation drives prices skyward.
Weinberg told CNBC's "Squawk Box Europe" on Wednesday that with industrial output and GDP back to pre-pandemic levels, the U.S. economy has essentially recovered. He argued that the labor market lagging is "typical for economic recessions," with unemployment following the 2008 global financial crisis taking around a decade to fully recover.
That said, November's jobs report indicated that the labor market was now gathering steam, with nonfarm payrolls increasing by 531,000 in October and driving the unemployment rate down to 4.6%.
"We have a problem related to specific sectors of the economy, not the economy overall. I was surprised to read those industrial production and manufacturing numbers, but they are what they are, and we are doing it now with 5 million fewer people working than before the pandemic, so this tells us that productivity ought to be up by maybe 3% or more compared to then," Weinberg said.
He suggested that the market needs to keep productivity gains in mind when looking at wage increases, which are "tolerable with steady, stable prices as long as they are offset by productivity gains."
Citing High Frequency Economics' aggregation of data across the component sectors within the CPI reading, Weinberg estimated that around one third are falling while half are growing at less than 2%, which he argued "is not inflation."
"The rise of selected categories, scattered categories of products within CPIs are making those averages of the basket price move higher, but that doesn't mean that all prices are moving higher along with all wages," Weinberg said.
"Inflation is a process of spiraling wages and prices, it is not a one-time event, an off-time shock to prices coming from an understandable supply shock."
Ignore 'hysterical people'
Weinberg cited Milton Friedman to make the case that Fed intervention based on these individual pockets of spiking inflation would likely do "more harm than good." He also highlighted comments from Fed Chair Jerome Powell and Bank of England Governor Andrew Bailey, both of whom have suggested that tightening policy in response to inflation resulting from temporary supply shocks would be counterproductive.
"Let's not be influenced by hysterical people like Larry Summers, who are telling us that inflation is taking off. Let's listen to what the people who actually are making policy are telling us," Weinberg said.
Summers was contacted for comment by CNBC. The former U.S. Treasury secretary has in recent weeks called on the Fed and the Biden administration to tackle rising inflation, and argued that the "transitory" label had run its course.
Elliot Smith 19 hrs ago
U.S. CPI inflation came in at an annual 6.2% in October, its steepest climb for more than 30 years.
The persistent high inflation and continued pressures such as supply chain bottlenecks have led many economists to question the Federal Reserve's long-held view that the spike will be "transitory."
A breakdown of the latest U.S. data indicates that inflation is confined to certain sectors and will not pose a threat to the recovery, according to Carl Weinberg, chief economist at High Frequency Economics.
U.S. CPI inflation came in at an annual 6.2% in October, its steepest climb for more than 30 years.
Energy, shelter and vehicle costs led the gains, which more than wiped out the wage increases that workers received for the month.
The persistent high inflation and continuation of pressures such as supply chain bottlenecks have led many economists to question the Federal Reserve's long-held view that the spike will be "transitory."
However, stronger-than-expected October retail sales and industrial production figures this week have indicated that the broader economic recovery may well be on track, even as inflation drives prices skyward.
Weinberg told CNBC's "Squawk Box Europe" on Wednesday that with industrial output and GDP back to pre-pandemic levels, the U.S. economy has essentially recovered. He argued that the labor market lagging is "typical for economic recessions," with unemployment following the 2008 global financial crisis taking around a decade to fully recover.
That said, November's jobs report indicated that the labor market was now gathering steam, with nonfarm payrolls increasing by 531,000 in October and driving the unemployment rate down to 4.6%.
"We have a problem related to specific sectors of the economy, not the economy overall. I was surprised to read those industrial production and manufacturing numbers, but they are what they are, and we are doing it now with 5 million fewer people working than before the pandemic, so this tells us that productivity ought to be up by maybe 3% or more compared to then," Weinberg said.
He suggested that the market needs to keep productivity gains in mind when looking at wage increases, which are "tolerable with steady, stable prices as long as they are offset by productivity gains."
Citing High Frequency Economics' aggregation of data across the component sectors within the CPI reading, Weinberg estimated that around one third are falling while half are growing at less than 2%, which he argued "is not inflation."
"The rise of selected categories, scattered categories of products within CPIs are making those averages of the basket price move higher, but that doesn't mean that all prices are moving higher along with all wages," Weinberg said.
"Inflation is a process of spiraling wages and prices, it is not a one-time event, an off-time shock to prices coming from an understandable supply shock."
Ignore 'hysterical people'
Weinberg cited Milton Friedman to make the case that Fed intervention based on these individual pockets of spiking inflation would likely do "more harm than good." He also highlighted comments from Fed Chair Jerome Powell and Bank of England Governor Andrew Bailey, both of whom have suggested that tightening policy in response to inflation resulting from temporary supply shocks would be counterproductive.
"Let's not be influenced by hysterical people like Larry Summers, who are telling us that inflation is taking off. Let's listen to what the people who actually are making policy are telling us," Weinberg said.
Summers was contacted for comment by CNBC. The former U.S. Treasury secretary has in recent weeks called on the Fed and the Biden administration to tackle rising inflation, and argued that the "transitory" label had run its course.
© Provided by CNBC Larry Summers at the World Economic Forum in Davos, Switzerland.
Despite having long advocated for more expansionary fiscal and monetary policy, Summers, now president emeritus of Harvard University, said in a Washington Post op-ed earlier this week that he had changed his view in the face of the evidence. He also challenged the notion that inflation was confined to just a few sectors.
"In October, prices for commodity goods outside of food and energy rose at more than a 12 percent annual rate," Summers said.
"Various Federal Reserve system indexes that exclude sectors with extreme price movements are now at record highs."
Despite having long advocated for more expansionary fiscal and monetary policy, Summers, now president emeritus of Harvard University, said in a Washington Post op-ed earlier this week that he had changed his view in the face of the evidence. He also challenged the notion that inflation was confined to just a few sectors.
"In October, prices for commodity goods outside of food and energy rose at more than a 12 percent annual rate," Summers said.
"Various Federal Reserve system indexes that exclude sectors with extreme price movements are now at record highs."
'We don’t deserve this': Inflation hits Turkish people hard
ISTANBUL (AP) — Market-stand owner Kadriye Dogru makes do with stale, sesame-covered bagels, known as simit, for lunch these days. The widowed mother of two says she goes without lunch so she can put food on the table for her family later in the day.
ISTANBUL (AP) — Market-stand owner Kadriye Dogru makes do with stale, sesame-covered bagels, known as simit, for lunch these days. The widowed mother of two says she goes without lunch so she can put food on the table for her family later in the day.
© Provided by The Canadian Press
The money that the 59-year-old earns by selling sweatpants and other garments at Istanbul's Ortakcilar market no longer lasts, and she is struggling to buy food, let alone anything else.
“I had never experienced such a deplorable life. I go to sleep, I wake up and the prices have gone up. I bought a 5-litre can of (cooking) oil, it was 40 lira. I went back, it was 80 lira,” she said. “We don’t deserve this as a nation.”
Many people in Turkey are facing increased hardship as prices of food and other goods have soared. While rising consumer prices are affecting countries worldwide as they bounce back from the coronavirus pandemic, economists say Turkey's eye-popping inflation has been exacerbated by economic mismanagement, concerns over the country’s financial reserves and President Recep Tayyip Erdogan’s push to cut interest rates.
He claims lower borrowing costs will boost growth, though economists say just the opposite is the way to tame soaring prices. The Turkish lira has been tumbling to record lows against the U.S. dollar as the country’s central bank has slashed interest rates, fueling concerns about its independence.
Caught in the middle are everyday Turks trying to make ends meet.
“Everything is so expensive, I cannot buy anything,” Suheyla Poyraz said as she browsed food stalls at the Ortakcilar market in Istanbul’s Eyupsultan district.
The 57-year-old homemaker has voted for Erdogan’s party and called on the government to act to end inflation.
“If you are the government and if we are voting for you to put things right, why aren’t you intervening? Why aren’t you stopping the rising prices?” Poyraz said.
High inflation has been hurting the popularity ratings of Erdogan, whose early years in power were marked by a strong economy. Opinion surveys indicate that an alliance of opposition parties that have formed a bloc against Erdogan’s ruling party and its nationalist allies are fast narrowing the gap.
The Turkish government says inflation rose nearly 20% in October compared with a year earlier, but the independent Inflation Research Group, made up of academics and former government officials, put it close to a stunning 50%. In comparison, U.S. prices rose about 6% from a year ago — the most since 1990 — and inflation in the 19 European Union countries that use the euro exceeded 4%, the highest in 13 years.
Turkey's currency, as a result, hit an all-time low of 10 against the U.S. dollar last week and has lost some 25% of its value since the start of the year. That is driving prices higher, making imports, fuel and everyday goods more expensive. While some argue that a weaker lira makes Turkish exporters more competitive in the global economy, much of Turkey’s industry relies on imported raw materials.
There are concerns about Erdogan's influence over monetary policy. He's appointed four central bank governors since 2019 and fired bankers who are said to have resisted lowering interest rates. The bank has decreased rates by 3 percentage points since September and will release its latest decision Thursday.
In contrast, central banks in other pandemic-hit countries have been raising rates or considering doing so in the months ahead as backups at ports and factories, labor shortages and soaring energy costs have pushed up prices.
Foreign investors have been dumping Turkish assets, and Turks have been converting their savings to foreign currencies and gold.
“There has been a massive selloff in financial markets just due to this intervention to the central bank’s independence,” said Ozlem Derici Sengul, an economist and founding partner of the Istanbul-based Spinn Consulting. “There are several factors that move both inflation and financial market prices ... (but) the dominant factor is the central bank’s policy.”
She estimates more than half of the population “is struggling in terms of income.”
Erdogan, meanwhile, insists that the economy is strong and that the country is emerging from the pandemic in better shape than others.
“Shelves in Europe are empty, they are empty in the United States. Praise to God, we are continuing with plentitude and abundance,” he has said.
His government has blamed exorbitant food prices on supermarket chains and ordered an investigation that has resulted in fines. He also has ordered agricultural cooperatives to open a thousand new shops across the country in a bid to keep food prices low.
Earlier, he accused a group of students who slept outdoors in parks to protest high housing and dormitory prices of “terrorism.” Meanwhile, rents have skyrocketed and prices for home sales, mostly pegged on the dollar, are increasing.
In a bid to alleviate suffering, Labor and Social Security Minister Vedat Bilgin said this month that the government was working to adjust the minimum wage to protect workers against rising prices.
“We are working to remove the issue of minimum wage from the agenda — I can already say that it will provide a relief,” he said.
Economists say it's not enough.
“The inflation and low income and uneven income distribution will have more side effects in 2022 and 2023 if the government continues to insist on low interest rates, loose monetary policy and election preparations,” Sengul said.
Musa Timur, who owns a grocery store in Istanbul, said rising prices make it hard for him to replace products.
“Any product that we sell — we cannot get them in at the same prices,” he said.
He said his customers are no longer able to afford a variety of food and mostly buy bread, pasta and eggs.
___
Fraser reported from Ankara, Turkey. Associated Press journalists Zeynep Bilginsoy and Ayse Wieting in Istanbul contributed.
___
This story was first published on Nov. 16, 2021. It was updated on Nov. 17, 2021, to correct that Turkey’s central bank has decreased interest rates by 3 percentage points since September, not increased them.
Mehmet Guzel And Suzan Fraser, The Associated Press
The money that the 59-year-old earns by selling sweatpants and other garments at Istanbul's Ortakcilar market no longer lasts, and she is struggling to buy food, let alone anything else.
“I had never experienced such a deplorable life. I go to sleep, I wake up and the prices have gone up. I bought a 5-litre can of (cooking) oil, it was 40 lira. I went back, it was 80 lira,” she said. “We don’t deserve this as a nation.”
Many people in Turkey are facing increased hardship as prices of food and other goods have soared. While rising consumer prices are affecting countries worldwide as they bounce back from the coronavirus pandemic, economists say Turkey's eye-popping inflation has been exacerbated by economic mismanagement, concerns over the country’s financial reserves and President Recep Tayyip Erdogan’s push to cut interest rates.
He claims lower borrowing costs will boost growth, though economists say just the opposite is the way to tame soaring prices. The Turkish lira has been tumbling to record lows against the U.S. dollar as the country’s central bank has slashed interest rates, fueling concerns about its independence.
Caught in the middle are everyday Turks trying to make ends meet.
“Everything is so expensive, I cannot buy anything,” Suheyla Poyraz said as she browsed food stalls at the Ortakcilar market in Istanbul’s Eyupsultan district.
The 57-year-old homemaker has voted for Erdogan’s party and called on the government to act to end inflation.
“If you are the government and if we are voting for you to put things right, why aren’t you intervening? Why aren’t you stopping the rising prices?” Poyraz said.
High inflation has been hurting the popularity ratings of Erdogan, whose early years in power were marked by a strong economy. Opinion surveys indicate that an alliance of opposition parties that have formed a bloc against Erdogan’s ruling party and its nationalist allies are fast narrowing the gap.
The Turkish government says inflation rose nearly 20% in October compared with a year earlier, but the independent Inflation Research Group, made up of academics and former government officials, put it close to a stunning 50%. In comparison, U.S. prices rose about 6% from a year ago — the most since 1990 — and inflation in the 19 European Union countries that use the euro exceeded 4%, the highest in 13 years.
Turkey's currency, as a result, hit an all-time low of 10 against the U.S. dollar last week and has lost some 25% of its value since the start of the year. That is driving prices higher, making imports, fuel and everyday goods more expensive. While some argue that a weaker lira makes Turkish exporters more competitive in the global economy, much of Turkey’s industry relies on imported raw materials.
There are concerns about Erdogan's influence over monetary policy. He's appointed four central bank governors since 2019 and fired bankers who are said to have resisted lowering interest rates. The bank has decreased rates by 3 percentage points since September and will release its latest decision Thursday.
In contrast, central banks in other pandemic-hit countries have been raising rates or considering doing so in the months ahead as backups at ports and factories, labor shortages and soaring energy costs have pushed up prices.
Foreign investors have been dumping Turkish assets, and Turks have been converting their savings to foreign currencies and gold.
“There has been a massive selloff in financial markets just due to this intervention to the central bank’s independence,” said Ozlem Derici Sengul, an economist and founding partner of the Istanbul-based Spinn Consulting. “There are several factors that move both inflation and financial market prices ... (but) the dominant factor is the central bank’s policy.”
She estimates more than half of the population “is struggling in terms of income.”
Erdogan, meanwhile, insists that the economy is strong and that the country is emerging from the pandemic in better shape than others.
“Shelves in Europe are empty, they are empty in the United States. Praise to God, we are continuing with plentitude and abundance,” he has said.
His government has blamed exorbitant food prices on supermarket chains and ordered an investigation that has resulted in fines. He also has ordered agricultural cooperatives to open a thousand new shops across the country in a bid to keep food prices low.
Earlier, he accused a group of students who slept outdoors in parks to protest high housing and dormitory prices of “terrorism.” Meanwhile, rents have skyrocketed and prices for home sales, mostly pegged on the dollar, are increasing.
In a bid to alleviate suffering, Labor and Social Security Minister Vedat Bilgin said this month that the government was working to adjust the minimum wage to protect workers against rising prices.
“We are working to remove the issue of minimum wage from the agenda — I can already say that it will provide a relief,” he said.
Economists say it's not enough.
“The inflation and low income and uneven income distribution will have more side effects in 2022 and 2023 if the government continues to insist on low interest rates, loose monetary policy and election preparations,” Sengul said.
Musa Timur, who owns a grocery store in Istanbul, said rising prices make it hard for him to replace products.
“Any product that we sell — we cannot get them in at the same prices,” he said.
He said his customers are no longer able to afford a variety of food and mostly buy bread, pasta and eggs.
___
Fraser reported from Ankara, Turkey. Associated Press journalists Zeynep Bilginsoy and Ayse Wieting in Istanbul contributed.
___
This story was first published on Nov. 16, 2021. It was updated on Nov. 17, 2021, to correct that Turkey’s central bank has decreased interest rates by 3 percentage points since September, not increased them.
Mehmet Guzel And Suzan Fraser, The Associated Press
Walmart and Target clash with investors over strategy to keep prices low despite inflation
Melissa Repko
Investors are selling off shares of Walmart and Target after the discounters pledged to absorb some higher costs rather than passing it on to consumers.
Both Walmart CEO Doug McMillon and Target CEO Brian Cornell say they are playing the long game to win new customers, deepen loyalty and keep up sales momentum.
"It's all about market share, market share, market share," Brian Yarbrough, a retail analyst for Edward Jones. "And typically when you're focused on market share that can come at the expense of profitability."
© Provided by CNBC
Walmart and Target put up strong third-quarter performances this week, beat Wall Street's expectations and spoke of holiday shoppers already starting to splurge on gifts and gatherings this season. Yet the investor response was swift: A brutal sell-off.
Target shares closed down about 5% Wednesday. Walmart closed down nearly 3% on Tuesday, after its earnings report. Shares continued to drop Wednesday, erasing all its gains year-to-date.
The two sides are at odds on the retailers' strategy of absorbing some of the rising costs of shipping, labor and materials rather than passing them on to customers with higher prices. Both Walmart CEO Doug McMillon and Target CEO Brian Cornell have drawn a clear line. Their strategy: Keep prices low in a bid for customer loyalty — even if it means a hit to profits.
The pushback they're hearing is: Why not charge shoppers more? Americans have had a ravenous appetite for shopping. They socked away money during the pandemic and the holiday forecasts are rosy.
McMillon said Walmart must uphold its reputation for value — or risk scaring away customers who feel sticker shock. He invoked the big-box retailer's founder in an interview on Tuesday with CNBC's "Squawk on the Street."
"We save people money and help them live a better life," he said. "Those are the words that came out of [Walmart founder] Sam Walton's mouth. He loved to fight inflation. So do we."
Cornell said Target is playing the long game, too, even as that means swallowing extra costs.
"We are protecting prices," he said on a call with reporters. "It's as important to our guests this year as safety has been throughout the pandemic."
He and the company's team of executives defended that strategy, even as they were peppered with questions by analysts on an early Wednesday earnings call.
'All about market share'
Target and Walmart have seen significant sales gains during the pandemic, as consumers avoided the mall, bought more groceries and sought out items for more time at home from puzzles to loungewear.
Target, in particular, has seen eye-popping numbers that make for tough comparisons. The company's 2020 sales grew by more than $15 billion — greater than its total sales growth over the prior 11 years. And its stock, even with Wednesday's selling, is up more than 43%, putting its market value at more than $123 billion.
Target has touted its market share gains frequently on calls with investors. It picked up about $9 billion in market share in the fiscal year ended Jan. 30, based on research by the company and third-parties. It said it gained another $1 billion in market share in the first three months of this fiscal year.
Now, both retailers face new complexities. Consumers are juggling added expenses, from commutes to the office to vacations and meals at restaurants. They are spending through the extra cash that they saved up during the earlier part of the pandemic or received from stimulus checks. And they are seeing the price of groceries, gas and more jump. At the same time, the retailers are deciding to spend more on transportation — going so far as to charter their own ships, to make sure shelves are well stocked — and they have had to raise wages and sweeten benefits to ensure warehouses and stores are staffed and running smoothly.
Steph Wissink, a retail analyst for Jefferies, said after Target and Walmart's outsized gains in the last 18 months "giving up that momentum is hard to do."
"Price is one lever they have to continue to honor their customer promises and to aggressively defend their share," she said.
The unusual environment has led to mixed signals about consumers' mindset and potential behavior, according to Wissink.
"In the U.S., hyperinflation isn't something we regularly navigate so there's no precedent, recent experience, or muscle memory to tap into," she said. "We can observe other markets of the world as proxies but the U.S. economy is uniquely consumer-driven."
With the move to keep prices low, Target and Walmart have signaled the companies fear losing customers and sales if costs are passed through, she said. That's why, the retailers are "strategically putting their own margins on the line to ensure consumerism continues to advance," Wissink explained.
Brian Yarbrough, a retail analyst for Edward Jones, said it will take time to see if Walmart and Target are making a smart bet or a terrible mistake.
"It's all about market share, market share, market share," he said. "And typically when you're focused on market share that can come at the expense of profitability."
Inflation at a three-decade high
Inflation hit a three-decade high in October, according to the Labor Department. The consumer price index, which includes a mix of products ranging from gasoline and health care to groceries and rents, rose 6.2% from a year ago, the most since December 1990.
Some categories have seen a bigger jump than others. Fuel, for instance, surged 12.3% for October. Used vehicle prices rose 2.5% for the month. And food prices grew by 0.9% — with meat, poultry, fish and eggs collectively increasing 1.7%.
Food is a big category for Walmart and Target. Walmart is the largest grocer in the country by revenue. Target has used its grocery business as a traffic driver.
On a Wednesday earnings call, Target's Cornell called growth of its food and beverage category "one of the real success stories within our business over the last few years." He said pantry-stocking trips have inspired customers to toss a variety of other merchandise into their shopping carts and driven higher online sales as people get a gallon of milk through curbside pickup.
Cornell and McMillon said they are not seeing signs of price-sensitive customers, such as trading down to smaller packs or cheaper brands.
Katie Thomas, lead of the Kearney Consumer Institute, said some costs are easier to pass on to shoppers. With food, she said, a price hike is risky.
"Grocery is more complicated because consumers are going to feel it in their everyday," she said. "Even in the pandemic, we all felt like prices were already going up because people were buying more and they were taking less frequent [store] trips. People are very aware of it."
With other categories, she said, retailers can get away with bumping up price. The tricky part, she said, is for retailers to figure out where shoppers will pay a premium and what may spook them.
"Even in a period of a recession or of inflation, consumers are just going to make trade-offs in certain categories instead of trade downs across the board," she said. For instance, she said, some people are willing to buy off-brand grocery bags or ketchup — but are unwilling to buy a lower quality steak or skip a trip to the hair salon.
Walmart and Target put up strong third-quarter performances this week, beat Wall Street's expectations and spoke of holiday shoppers already starting to splurge on gifts and gatherings this season. Yet the investor response was swift: A brutal sell-off.
Target shares closed down about 5% Wednesday. Walmart closed down nearly 3% on Tuesday, after its earnings report. Shares continued to drop Wednesday, erasing all its gains year-to-date.
The two sides are at odds on the retailers' strategy of absorbing some of the rising costs of shipping, labor and materials rather than passing them on to customers with higher prices. Both Walmart CEO Doug McMillon and Target CEO Brian Cornell have drawn a clear line. Their strategy: Keep prices low in a bid for customer loyalty — even if it means a hit to profits.
The pushback they're hearing is: Why not charge shoppers more? Americans have had a ravenous appetite for shopping. They socked away money during the pandemic and the holiday forecasts are rosy.
McMillon said Walmart must uphold its reputation for value — or risk scaring away customers who feel sticker shock. He invoked the big-box retailer's founder in an interview on Tuesday with CNBC's "Squawk on the Street."
"We save people money and help them live a better life," he said. "Those are the words that came out of [Walmart founder] Sam Walton's mouth. He loved to fight inflation. So do we."
Cornell said Target is playing the long game, too, even as that means swallowing extra costs.
"We are protecting prices," he said on a call with reporters. "It's as important to our guests this year as safety has been throughout the pandemic."
He and the company's team of executives defended that strategy, even as they were peppered with questions by analysts on an early Wednesday earnings call.
'All about market share'
Target and Walmart have seen significant sales gains during the pandemic, as consumers avoided the mall, bought more groceries and sought out items for more time at home from puzzles to loungewear.
Target, in particular, has seen eye-popping numbers that make for tough comparisons. The company's 2020 sales grew by more than $15 billion — greater than its total sales growth over the prior 11 years. And its stock, even with Wednesday's selling, is up more than 43%, putting its market value at more than $123 billion.
Target has touted its market share gains frequently on calls with investors. It picked up about $9 billion in market share in the fiscal year ended Jan. 30, based on research by the company and third-parties. It said it gained another $1 billion in market share in the first three months of this fiscal year.
Now, both retailers face new complexities. Consumers are juggling added expenses, from commutes to the office to vacations and meals at restaurants. They are spending through the extra cash that they saved up during the earlier part of the pandemic or received from stimulus checks. And they are seeing the price of groceries, gas and more jump. At the same time, the retailers are deciding to spend more on transportation — going so far as to charter their own ships, to make sure shelves are well stocked — and they have had to raise wages and sweeten benefits to ensure warehouses and stores are staffed and running smoothly.
Steph Wissink, a retail analyst for Jefferies, said after Target and Walmart's outsized gains in the last 18 months "giving up that momentum is hard to do."
"Price is one lever they have to continue to honor their customer promises and to aggressively defend their share," she said.
The unusual environment has led to mixed signals about consumers' mindset and potential behavior, according to Wissink.
"In the U.S., hyperinflation isn't something we regularly navigate so there's no precedent, recent experience, or muscle memory to tap into," she said. "We can observe other markets of the world as proxies but the U.S. economy is uniquely consumer-driven."
With the move to keep prices low, Target and Walmart have signaled the companies fear losing customers and sales if costs are passed through, she said. That's why, the retailers are "strategically putting their own margins on the line to ensure consumerism continues to advance," Wissink explained.
Brian Yarbrough, a retail analyst for Edward Jones, said it will take time to see if Walmart and Target are making a smart bet or a terrible mistake.
"It's all about market share, market share, market share," he said. "And typically when you're focused on market share that can come at the expense of profitability."
Inflation at a three-decade high
Inflation hit a three-decade high in October, according to the Labor Department. The consumer price index, which includes a mix of products ranging from gasoline and health care to groceries and rents, rose 6.2% from a year ago, the most since December 1990.
Some categories have seen a bigger jump than others. Fuel, for instance, surged 12.3% for October. Used vehicle prices rose 2.5% for the month. And food prices grew by 0.9% — with meat, poultry, fish and eggs collectively increasing 1.7%.
Food is a big category for Walmart and Target. Walmart is the largest grocer in the country by revenue. Target has used its grocery business as a traffic driver.
On a Wednesday earnings call, Target's Cornell called growth of its food and beverage category "one of the real success stories within our business over the last few years." He said pantry-stocking trips have inspired customers to toss a variety of other merchandise into their shopping carts and driven higher online sales as people get a gallon of milk through curbside pickup.
Cornell and McMillon said they are not seeing signs of price-sensitive customers, such as trading down to smaller packs or cheaper brands.
Katie Thomas, lead of the Kearney Consumer Institute, said some costs are easier to pass on to shoppers. With food, she said, a price hike is risky.
"Grocery is more complicated because consumers are going to feel it in their everyday," she said. "Even in the pandemic, we all felt like prices were already going up because people were buying more and they were taking less frequent [store] trips. People are very aware of it."
With other categories, she said, retailers can get away with bumping up price. The tricky part, she said, is for retailers to figure out where shoppers will pay a premium and what may spook them.
"Even in a period of a recession or of inflation, consumers are just going to make trade-offs in certain categories instead of trade downs across the board," she said. For instance, she said, some people are willing to buy off-brand grocery bags or ketchup — but are unwilling to buy a lower quality steak or skip a trip to the hair salon.
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