How do you explain the crisis in the supply chain?
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(CNN Business) -
If you're shopping for Christmas you've probably noticed that prices have gone up on groceries, basic items, appliances, fast food, and all kinds of consumer goods.
Inflation in the United States is at a high of more than a decade.
That means 2021 will be one of the most expensive Christmas shopping seasons ever.
But buyers are not holding back yet.
Businesses are confident that they will continue to pay higher prices, especially during the end of the year holidays.
They better be right: If consumers decide to cut back, the US economy could be in big trouble.
It's the economy, stupid!
Despite a global supply chain crisis, a resurgence of COVID-19 cases, and high inflation, the US economy is holding up in pretty decent shape.
Consumers aren't spending as much as they did in the spring, when they still had piles of money to spend from their stimulus checks, but they continue to open their wallets, albeit for some smaller purchases.
Consumer spending rose a healthy 0.6% in September after growing 1% in August, the Office of Economic Analysis reported Friday.
But the report came with some red flags: Large purchases of durable goods (think cars and appliances) fell 0.2%, while spending on other non-durable items rose 0.9%, mainly because prices of food and gasoline are rising.
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Albertsons and other chains expect consumers to pay higher prices without much resistance.
That suggests that consumers are willing to keep spending, even when prices go up.
But they could be holding back on some higher value items.
The good news is that the delta variant appears to be on the decline, at least for now.
Consumers could start venturing out again towards the end of the year if the trend continues.
And automakers report that the supply chain crisis has eased, seriously reducing inventory, which could help drive car prices down a bit and lead to some solid year-end buying. , maybe some fancy cars with bows on top for holiday gifts.
However, if an unforgettable December awaits us, consumers will have to continue to grapple with higher prices.
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Merry Christmas to the shops
Economists and retail chains are confident that consumers will continue to spend during the holidays.
With higher wages and many jobs waiting to be filled, Americans have money to spend this Christmas, even if prices are higher.
"As the wave of [the variant] delta recedes, consumer spending increases, and the most recent data shows higher hotel occupancy and restaurant visits," said BMO senior economist Sal Guatieri.
People are returning to work and wages keep rising along with inflation.
They have also accumulated savings during the pandemic, giving shoppers and stores a tailwind heading into the holidays, according to Guatieri.
"Christmas sales appear to be very strong this year ... if the stores can find enough workers to deliver them," he said.
Retail sales in November and December are expected to grow 8.5-10.5% this year compared to the 2020 holiday season, to a record of as much as $ 859 billion, the National Federation of Retailers, a trade group of retailers.
The figure excludes car dealerships, gas stations, and restaurants.
"All we hear from consumers we speak to regularly is that they are excited about the holiday season," Target Chief Executive Brian Cornell said in an interview with Yahoo Finance on Monday.
"We certainly hope to see a very strong and solid holiday season."
However, supply chain challenges remain a huge factor that could derail the holiday season.
Even Amazon and Apple are dealing with the global supply chain crisis.
Both companies reported revenue results Thursday that fell short of Wall Street analysts' expectations and warned that supply chain issues could affect business in the December quarter.
Shipping delays mean that the supply and demand scales will remain unbalanced.
As your economics professor told you, that means prices will keep going up until the end of the year.
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Higher prices are "welcomed by customers"
However, companies are also confident that with scarce supply and red-hot demand, they have pricing power over customers and can pass the soaring costs they face onto customers.
"Consumers are paying higher prices because there are limited opportunities to buy other goods," said Gus Faucher, chief economist at PNC.
"If your dishwasher breaks and you need a new one, and there are few dishwashers, you are willing to pay a premium. The same goes for household products like cleaners, toothpaste or toys. That allows companies to raise prices." .
Procter & Gamble, Whirlpool, Coca-Cola, McDonald's and Albertsons have all said in recent days that customers aren't changing their shopping habits, even when prices go up.
They believe that consumers are in good financial shape and can afford to pay higher prices without too much resistance.
"We haven't seen a material change in customer behavior. And I think it speaks to the strength of the customer," Albertsons CEO Vivek Sankaran said in an earnings call earlier this month.
"We don't see his intention change drastically over the next few weeks and months."
McDonald's raised menu prices 6% recently, and the chain's chief financial officer Kevin Ozan said in an earnings conference call Wednesday that the increase "has been quite well received by customers."
But there are dangers to businesses and the economy in general if prices rise too high, as some customers may punish them by switching to lower-cost products or reducing their expenses.
Brands can also suffer if they get their prices wrong.
In 2019, when Clorox raised prices for Glad trash bags, retailers rebelled and reduced Glad's shelf space, reducing sales.
"If inflation persists at a high level and is stronger than wage growth, that would make consumers more cautious about their spending," said PNC's Faucher.
"They have to eat out less and go to the movies less. Instead of buying meat, they are going to buy ground meat."
Inflation
