Consumers are less willing to spend freely.
I shudder when my car comes up for routine maintenance. Every time we take it in, the mechanics find something so serious that they wouldn’t recommend I drive any further without fixing it. The average tab is several thousand dollars.
Because my car is very old, the repair estimates are approaching the value of the vehicle itself. So my wife suggested that we consider trading it in for a new one. We looked, but the dealer showed little interest in bargaining with us. Low inventory levels give him lots of pricing power.
The ability of merchants to increase prices is a subtle ingredient in the development of inflation. When costs go up, sellers will seek to pass them along to preserve their margins. During the pandemic era, stimulus-fueled demand intersected with supply limitations to bring pricing power to a zenith. Profit margins expanded, as did equity market valuations.
Slowly, but surely, leverage has been returning to consumers. Supply chains have healed, and the supply of labor has improved. Many households have exhausted the excess savings amassed during the pandemic, and wage increases have struggled to keep up with inflation. A renewed frugality has set in, and surveys of pricing power reflect it.
DIMINISHED PRICING POWER WILL BE GOOD FOR INFLATION, BUT BAD FOR PROFIT MARGINS.
There are still pockets of resistance. We typically see them where there is scarcity: residential real estate markets are a prime example, as the number of homes for sale is very low. Care giving falls into this category as well, with more need than providers.
Overall, however, the decline in pricing power will be welcomed by both consumers and central bankers seeking to bring inflation back down to targeted levels. For companies and their owners, the return to normalcy will intensify the search for productivity gains. Investments in the latest generation of artificial intelligence (AI) are one of several angles of pursuit.
The economic data suggests that the prices of new cars are falling, and industry experts report that dealer concessions are increasing. But we apparently focused on a model and a dealership that hasn’t read those headlines. I expect to be driving the old jalopy for a long while.
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