We have been too accepting of inflation

When inflation took off in the 1960s, people didn’t just grumble about rising prices — they protested in front of local stores. It’s time this generation of consumers push back harder against unnecessary price increases. Doing so might help avoid more destructive interest rate hikes.

Happily, the anti-inflation movement seems to be gaining steam.

The chief economist of UBS Global Wealth Management, Paul Donovan, is an unlikely revolutionary. In a recent note on how corporate profits have stoked inflation, he proposed a radical-sounding solution: a consumer rebellion against unfair price hikes. “Convincing consumers not to passively accept price increases is a potentially faster and less destructive way of reversing profit-margin-led inflation,” he wrote.

The women-led grocery store boycotts of the 1960s in the US were ultimately unsuccessful, and inflation was only stamped out years later by the Federal Reserve hiking interest rates to punishing levels. But today’s consumers have a far more effective tool than placards — social media.  

Some (reasonable) online shaming might persuade companies to voluntarily curb price increases to protect their brands and avoid a more draconian political response. Donovan highlighted an Israeli cottage cheese boycott in 2011 that swiftly curtailed soaring prices. The post-financial crisis UK media campaign against excessive food prices dubbed “Rip off Britain” was also effective.

Leaving a one-star Google review for a price-gouging local business or a TikTok campaign against a bigger target might sound anti-business. But it’s far better for the economy (and stock prices) than HUGE rate hikes that cause unnecessary unemployment. Workers will otherwise try to protect their purchasing power by bargaining for higher wages, and companies respond by hiking prices even more.

The idea that corporate profit expansion has been a big driver of inflation was once mostly confined to trade unions and left-wing academics, but it’s now taken seriously by central bankers. Bank of England governor Andrew Bailey has gone from urging workers to forgo big pay increases last year to telling companies to exercise restraint in setting prices. Smart move.

Briefly, the theory of profit-led inflation goes like this: Consumers have been conditioned to accept excessive prices increases by a torrent of bad news and economic shocks — first the pandemic, then supply chain upheaval, and more recently Russia’s invasion of Ukraine and soaring energy prices. It began to seem plausible that the price of everything should increase a lot. (Hence the term “excuseflation” coined by our friends at the Odd Lots podcast). 

And so, helped by savings built up during the early part of the pandemic, consumers were much less price sensitive than companies had anticipated. Rather than try to undercut each other to gain market share, businesses decided it was better to sell lower volumes at higher prices. Some of them limited supply of entry-level goods to push their brands further upmarket. On average, the cost of each vehicle sold by Mercedes-Benz Group has increased an astonishing 43% since 2019, while Deutsche Lufthansa boss Carsten Spohr crowed last month that higher airfares were “too much fun”.

The corporate spin was that consumers just loved their brands. A more plausible explanation is that many people haven’t experienced signification inflation in their adult lifetime — and couldn’t quite see that higher prices were often more than sufficient to offset the company’s increasing costs. 

Customers are rightly starting to question whether price increases are always justified. Key inputs such as natural gas, electricity, agricultural commodities, freight and fertiliser prices have fallen in recent months, and some companies, such as British pub chain JD Wetherspoon, have said supply bottlenecks have largely disappeared. Consumer expectations for future inflation have also moderated. 

There are other signs that shoppers are reaching an inflection point. The prices charged by the European consumer goods groups rose 10.4% in the final quarter of 2022, their highest level for two years, but the volume of goods sold fell 2.2%, also the most over that period, according to Bernstein Research. In the US, household savings are dwindling and corporate profit margins have begun to shrink.

“If there is a general suspicion of the motives behind price increases in an economy, there will be a tendency to curtail margin expansion,” UBS’s Donovan said.

So far, consumers have mostly gone about tackling inflation quietly by, for example, switching from household-name brands to supermarkets’ cheaper private-label goods, turning to no-frills stores such as Aldi and Lidl, or making products last longer.

But grumbling over prices has occasionally morphed into outright dissent. In November, shoppers took to Facebook to complain about WM Morrison Supermarkets selling a pack of 240 Yorkshire Tea bags for £8.25 (about R188). UK telecom companies have encountered a similar backlash after increasing prices by 14% from this month.

Companies are discovering their pricing power has limits and that being too greedy can hurt their brands. US beer producers overdid price increases last year and then saw demand slump. Walt Disneys new-old CEO Bob Iger admitted last month the company had been too “aggressive” in hiking prices at its parks.

Of course, there’s a danger that consumer anger is misdirected. The US’s biggest egg producer Cal-Maine Foods triggered outrage last month when it revealed a more than 700% increase in profits thanks to soaring egg prices. But it isn’t to blame for avian flu crimping the supply of hens. However, its complaining about rising production costs was possibly unwise: Its operating profit margins have increased from 8% to 41% in the past year.

Supermarkets are often the first target of public ire about prices, but their margins are modest compared to some of their suppliers. The big chains can do more to push those suppliers to justify further increases. Tesco’s “Beansgate” standoff last year with Kraft Heinz Food over higher prices led to baked beans and ketchup temporarily disappearing from its shelves. In January, Tesco chair John Allan said it had “fallen out” with several suppliers over their price hikes, though he didn’t identify which ones.

Many of us will look at the quoted price of a flight or hotel in the coming months, curse loudly, then click purchase anyway. But buying a product or service despite knowing the price is outrageous perpetuates inflation. Companies should be challenged to justify hikes and consumers shouldn’t be afraid to complain when not satisfied.

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