This post was originally published on this site.
I do most of our family’s grocery shopping—primarily at Costco, with a few supplemental trips to the local grocery store. Earlier this week, I needed to pick up a 12-pack of Coke. I remember not that long ago being able to buy three 12-packs on sale for $10. This week, one 12-pack was $11.99, with no substitution in sight.
Maybe that 3-for-$10 deal was the anomaly.
Or perhaps maybe companies have simply adopted the mindset that when they have pricing power, they should use it. It started with the supply chain disruptions during COVID, when higher prices made sense because costs were rising. But supply chains have largely normalized, and many of those price increases never came back down. Instead, we’re now talking about another 3% inflation on top of those earlier gains. Let’s face it, we have had prices annually rising. Below is a look at the YoY gains.
- 2021:+4.7%
- 2022:+8.0%
- 2023:+4.1%
- 2024:+2.9%
- 2025:+2.6%
If you looked at the gain in the price index since the end of 2020, it is up over 22%. This is despite the inflation target of 2%.
Higher prices have certainly been good for corporate earnings—and, in turn, stock prices. Coca-Cola, for example, reported better-than-expected earnings and revenue this week, and the stock is up more than 28% this year. But it raises an interesting question: Are companies growing because they’re selling more, or because they’re charging more?
One of the challenges with inflation is that once prices move higher, they rarely move back down. A COVID-driven spike in prices may have been understandable during the crisis, but once that shock passed, shouldn’t at least some of those increases have reversed? Maybe Coke shouldn’t be three 12-packs for $10 anymore, but it’s hard to argue that one 12-pack should now cost $11.99.
Inflation has a way of feeding on itself. Consumers get used to paying more, companies get used to charging more, and investors reward the higher earnings that result. The question is whether that cycle has become one of the biggest long-term inflation risks we face, and a cycle that needs to be broken.
Enter Kevin Warsh.
He is a new face. He has new ideas, but he also ushered in a new aha moment….”Inflation has not been broken”.
The statement the Fed issues was brief, but the last sentence was the mission statement. It was blunt. It was simple. Here is what the statement said:
“The Committee decided to maintain the target range for the federal funds rate at 3-1/2 to 3-3/4 percent, in support of the Federal Reserve’s dual mandate. The Committee reaffirmed its policy of maintaining ample reserves in the banking system.
Economic activity is expanding at a solid pace despite elevated uncertainty that owes, in part, to the conflict in the Middle East. Productivity growth and capital investment are strong. Job gains have kept pace with the workforce, and the unemployment rate has changed little.
Inflation remains elevated relative to the Committee’s 2 percent goal, in part reflecting supply shocks that have driven price increases in certain sectors, including energy. The Committee will deliver price stability.”
Part of today’s inflation can certainly be blamed on supply shocks. Energy prices matter. Transportation costs matter. But at some point, supply chains normalize, and the question becomes whether companies simply continue to push prices higher because consumers have grown accustomed to paying them. A jump in oil prices may justify a higher price at the pump, but does it really justify a $12 12-pack of Coke?
That’s the challenge facing Kevin Warsh and the Federal Reserve. They can’t lower the price of oil, negotiate grocery prices, or tell companies what they can charge. What they can do is try to slow demand enough to restore price stability and, perhaps more importantly, change inflation psychology. If consumers stop accepting higher prices and businesses begin worrying more about losing sales than raising margins, pricing power starts to shift.
That’s easier said than done. Once prices move up, they rarely move back down. So the real question isn’t whether the Fed can get Coke back to three 12-packs for $10. It’s whether they can finally break the mindset that every year prices simply have to be higher than the year before. If they can, that may end up being Kevin Warsh’s biggest accomplishment. If they can’t, consumers may continue to feel that inflation remains a problem long after the official inflation rate says otherwise.
We will see what happens but last month was a shift in the Fed mindset. How far will they go with it?
This article was written by Greg Michalowski at investinglive.com.
