$1.25? What happened to the dollar store?
We’re all feeling the effects of inflation these days, in everything from the price of houses, cars and health care to college educations. Yet somehow, it’s the little things that stand out, and nowhere is the waning value of the dollar more obvious than in the shrinking range of products for sale at exactly $1.
For bargain shoppers coast to coast, snagging a dollar deal has always had a special magic. But with inflation on the rise during the pandemic, holding the line on the $1 price point is getting tougher for dollar stores, and, in many cases, consumers are being asked to pay more.
Earlier this year, the Dollar Tree chain, where (unlike some other big chains with dollar in their name) nearly everything has sold for a buck, announced plans to jack up most of its assortment to $1.25. That’s a 25% increase, practically across the board.
The chain of discount variety stores explained that it’s battling not just the higher cost of goods, including freight and distribution, but also higher labor costs, as Dollar Tree, which has more than 15,000 storefronts across the nation, has been forced by the labor market to raise the hourly wages it typically pays to staff its outlets. The retailer says it’s confident that customers won’t push back against the $1.25 sticker price.
We’re not so sure.
There’s psychology at work in how consumers respond to inflation. The nightmare scenario for the U.S. Federal Reserve is a wage-price spiral, a continuous rise in prices where cost increases and wage increases follow each other up and up.
We last experienced that in the 1970s, and many Americans alive today have no idea how painful it was: Buying power eroded, wages fell perpetually behind and hard-earned savings lost their value even when safely socked away. Individuals and businesses made buying decisions partly to avoid higher prices they expected in the future, which in turn led to more price increases.
The U.S. economy isn’t trapped in that cycle yet. Despite inflation running at 6.2% in the 12 months ending Oct. 31, growth and employment are solid and supplychain pressures won’t last forever. Still, higher prices make the economy feel weaker than it is.
In much the same way, buying a fastfood sandwich for $1.09 just doesn’t feel as satisfying as getting it for a buck off a dollar menu.
When shoppers process prices in a retail setting, feelings matter. People are more likely to keep their money in their pockets if prices cross a psychological barrier like the dollar mark. Consumers also tend to rebel when they think a stated price is phony, as sometimes happens with slippery come-ons and component decouplings that understate the final cost of a good or service.
That’s part of the beauty of the one-dollar price point: A buck’s a buck — plus tax, of course, but we’ve long been conditioned not to see that as part of the base price.
As the value of that buck continues shrinking, the Federal Reserve is taking notice. This week, the Fed’s Open Market Committee meets to consider how to curb inflation that has hung around more stubbornly than its economists (and the administration of President Joe Biden in general) anticipated.
To boost the economic recovery from a pandemic-induced slump, the Fed had been buying $120 billion in assets each month.
In November, it started tapering its bond purchases, planning to end them entirely in mid-2022. Faced with more evidence of rising prices, it could pull the plug months sooner. That in turn would set the stage for a string of interest rate hikes aimed at tamping down inflation.
For most Americans, the machinations of the Fed are one thing; the prices they pay represent something much more tangible.
As Dollar Tree prepares to roll out its new $1.25 pricing, its customers at least can look forward to some new products and sizes that deliver better value for the extra money, such as groceries and frozen foods that have gotten too expensive for the chain to sell at $1.
And, elsewhere at least, there’s still stuff for sale at an even one dollar. Many fastfood restaurants offer $1 (or 99-cent) options, though they’ve had to reboot over the years with less-costly items to keep those menus going. With a buck, you can still download a tune or game app, pick up a couple of bananas in the grocery store or buy a scratch-off lottery ticket, which in very rare cases might even resolve all the inflation concerns of its owner.