Podcast Summary
Businesses prefer to maintain prices despite cost reductions: Despite easing inflation rates, businesses continue to keep prices high, as revealed in quarterly earnings calls, preferring to maintain profits rather than lower prices.
Businesses are hesitant to lower prices even when their costs decrease, as seen in the current economic climate where inflation rates have eased but prices for certain goods remain high. Economist Isabella Bieber explains that this reluctance to reduce prices is not a mystery, as corporate pricing decisions are discussed openly in quarterly earnings calls, which are publicly available for researchers to analyze. This information reveals that businesses prefer to maintain their prices rather than lower them, even when faced with cost reductions. This trend was particularly evident during the pandemic years. Understanding these pricing dynamics can provide insights into economic trends and corporate behavior.
Corporate Profits Fueling Inflation: Corporate leaders are maintaining high prices despite decreasing commodity costs, contributing to inflation and potentially larger profit margins.
Corporate leaders are actively contributing to inflation through price increases, and they are openly discussing their strategies to maintain these higher prices even when commodity costs decrease. Economist Isabella Amore, along with some European Central Bankers, argues that these record corporate profits are a significant cause of inflation. Companies like Hilton and DuPont have publicly acknowledged the current inflationary environment and their ability to adjust prices frequently. The CEO of DuPont, for instance, stated that during a potential recession and decreasing commodity costs, their goal would be to maintain a price gap. This means that corporations can keep prices high while costs decrease, resulting in larger profit margins. Conversely, their worst-case scenario is a price war, where they are forced to lower prices to remain competitive. This discussion highlights the role of corporate decisions in the current inflation trend and the potential implications for consumers and the economy.
Steering customers towards cheaper options and introducing new, lower-priced products: Companies with market power can maintain high prices even in a demand decrease, instead of lowering prices, they can steer customers towards cheaper options or introduce new, lower-priced products to meet demand and insulate from deflationary pressures.
Some companies, particularly large corporations, have the market power to maintain high prices even when demand decreases. Instead of lowering prices as a first response, they may employ alternative strategies. One such strategy is to steer customers towards less expensive versions of their products. Another strategy is to introduce a new, lower-priced product to capture demand at a different price point. These tactics allow companies to meet demand without relying on price cuts, which can help insulate them from the deflationary pressures that can lead to severe economic downturns. PepsiCo's CEO, Ramon Laguarta, exemplified this approach when he expressed confidence in consumers' willingness to pay for the company's premium brands, even in the face of slowing demand.
Managing costs during economic uncertainty: CEO Greg Majewski introduced new menu items, cut prices, and secured long-term contracts to help manage costs and retain customers during economic uncertainty.
During times of economic uncertainty or rising costs, smaller businesses like Crave Worthy Brands can adapt by introducing new menu items, cutting prices strategically, and securing long-term contracts with suppliers to help manage costs and retain customers. CEO Greg Majewski, who owns restaurant brands like Wing It On and Genghis Grill, had to navigate these challenges during the pandemic. He raised menu prices, looked for cheaper substitutions, and negotiated better deals with suppliers. However, with the potential for an economic slowdown and increasing customer frustration over price hikes, he decided to launch new fried rice bowls starting at $8.49 and cut prices by up to $3 on some items. Although this meant taking a hit on profit margins, he believed it was necessary to keep customers coming through the doors. Additionally, he signed a year-long beef contract to help stabilize costs. While it's unlikely that businesses will return to pre-COVID pricing, learning to manage costs and setting customer expectations are crucial for survival.
Hoping for Stable Inflation and Discounted Real Estate: Businesses and the Federal Reserve want stable inflation, but it's unclear if it's happening. High interest rates lead to discounted real estate, making Fundrise an attractive option. Mint Mobile offers unlimited wireless plans for $15 a month with a 3-month commitment.
Both businesses and the Federal Reserve are hoping for a return to more stable inflation expectations, where annual price increases are modest. However, it remains to be seen if this is truly happening, as it will take several more months of inflation data to determine if this trend continues. Meanwhile, in the world of investing, high interest rates have led to discounted real estate valuations. The Fundrise flagship fund aims to expand its $1 billion real estate portfolio in the coming months, making it an attractive option for investors. On a separate note, for those looking to save on their wireless bills, Mint Mobile offers unlimited talk, text, and data plans for $15 a month with a 3-month commitment. This spring, consider cleaning up your wireless bill with Mint Mobile. As always, it's important to carefully consider the investment objectives, risks, charges, and expenses before investing in any fund. In the case of the Fundrise flagship fund, be sure to read the prospectus at fundrise.com/flagship. And for Mint Mobile, keep in mind that there is a $45 upfront payment required for the initial 3-month plan and additional taxes, fees, and restrictions apply. This episode was produced by Vietle, engineered by Katherine Silva, fact-checked by Dylan Sloan, and edited by Kate Kincannon. The Indicator is a production of NPR.
