Get ready to shell out more for products, economists say
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 PullUps 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,” Kofi Bruce, the company’s chief financial officer, said on a call with analysts.
These price increases reflect what some economists are calling a 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 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% in March, the largest rise since August 2012, according to the Bureau of Labor Statistics.
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,” 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 were not in a position to balance out the price-andcost 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,” Portell said. “This is a reset of the market.”
It is 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.