By Gillian Friedman
Source: The New York Times
Procter & Gamble is raising prices on items like Pampers and Tampax in September. Kimberly-Clark said in March that it will raise prices on Scott toilet paper, Huggies and Pull-Ups in June, a move that is “necessary to help offset significant commodity cost inflation.”
And General Mills, which makes cereal brands including Cheerios, is facing increased supply-chain and freight costs “in this higher-demand environment,” the company’s chief financial officer, Kofi Bruce, said on a call with analysts.
These price increases reflect what some economists are calling a major shift in the way companies have responded to demand during the pandemic.
Before the virus hit, retailers often absorbed the cost when suppliers raised prices on goods, because stiff competition forced retailers to keep prices stable. The pandemic changed that.
It created chaos and confusion in global shipping markets, leading to shortages and price increases that have cascaded from factories to ports to stores to consumers. When the pandemic hit, Americans’ shopping habits shifted rapidly — with people spending money on treadmills and office furniture instead of going out to eat in restaurants and seeing movies at theaters.
This, in turn, put enormous pressure on factories in China to produce these goods and ship them across the Pacific in containers. But the demand for shipping outstripped the availability of containers in Asia, yielding shortages that resulted in higher shipping costs.
The Consumer Price Index, the measure of the average change in the prices paid by U.S. shoppers for consumer goods, increased 0.6 percent in March, the largest rise since August 2012, according to the Bureau of Labor Statistics.
Higher costs aren’t affecting just the United States. British inflation hit 0.7 percent in March, fueled by the prices of oil and clothing.
In the beginning of the Covid-19 crisis, companies were focused on responding to the surge brought on by panic buying, with people stocking up on items like toilet paper, cleaning supplies, canned food and masks, said Greg Portell, a partner at Kearney, a consulting firm. The government was watching for price gouging, and customers were wary of being taken advantage of.
“When the pandemic first struck paper, toilet paper was like gold,” Mr. Portell said. “The optics of trying to take a price increase during that time just weren’t going to be good.”
Thus, despite the spike in demand, companies weren’t in a position to balance out the price-and-cost equation. Now that the economy is beginning to stabilize, companies are starting to make different economic calculations, rebalancing pricing so that it better fits their profit expectations and takes into account inflation, which will drive up prices.
“This isn’t an opportunistic profit-taking by companies,” Mr. Portell said. “This is a reset of the market.”
The government’s pumping of money into the economy through recent stimulus packages has also given retailers more room to raise prices. People who have received unemployment benefits or stimulus checks are able to spend that money on consumer goods like toilet paper and diapers.
Many of those who have kept their jobs during the pandemic also have been able to increase their savings. That means they have disposable income to spend on more expensive items like printers or desks for working at home, or on luxuries like televisions, hot tubs or kitchen remodels.
“Right now, demand is fiscally stimulated and very strong,” said Gregory Daco, chief U.S. economist for the firm Oxford Economics. “So even if you raise your prices, you’re not necessarily going to lose market share, because most other producers are doing the same thing and because people have the means to buy.”
It’s likely that retailers, from big-box stores to grocery stores, will pass on the majority of the increased costs from suppliers to consumers.
“Consumption is likely very strong the next couple of quarters, which will give companies a bit more pricing power to pass through some of those cost increases, which otherwise they might have had to absorb in their margins,” said Tim Drayson, head of economics at Legal and General Investment Management, an asset management firm.
However, businesses will still have to keep price increases reasonable and in line with competition.
“Businesses will tend to pass on what the consumer can stomach,” said John Ruth, chief executive of Build Asset Management, an investment advisory firm. “You’ll notice some price increases, but your hamburger isn’t going to double in your local favorite drive-through.”
Price increases for necessities like toilet paper and diapers will affect low-income Americans most profoundly, placing an additional burden on those already hard hit by the pandemic.
Whether the increased prices will stick, or eventually come down, is a topic of debate among economists. Some predict that prices will normalize within one to two years, as the economy continues to gain steam, the job market improves and those who lost jobs during the pandemic increasingly return to work.
“People are not going to buy used cars, or even new cars, forever,” Mr. Daco said. “At some point, demand will be saturated, and that will be the start of an environment of reduced price.”