The Prices Don’t Feel Right: Unraveling the Inflation Perception

Key Takeaways

  • Consumers are experiencing the impact of rising inflation, particularly in the grocery sector, leading to a shift in consumer sentiment and the need to reassess budgets.
  • Major retailers like Target and Walgreens are addressing consumer concerns by announcing price cuts, aiming to break the perception that prices only go up.
  • The perception of lower prices has a powerful effect on consumer sentiment, but for now, many consumers still feel that prices are not right.

Inflation is not fun. And—for the past 30 years—it has largely been a non-issue for consumers. That dynamic has changed. The relevant question is whether this is something persistent and meaningful or simply a fleeting feeling.

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Source: University of Michigan Consumer Sentiment Survey.

This is where some extrapolation is worthwhile. There should be little doubt the price hikes of 2022–2023 were problematic for consumers. They noticed. Volumes for the major grocery store aisle companies fell, and over the past few quarters many announced plans to regain their lost volumes. Now, there is a different narrative. First, it was Target announcing price cuts. Then it was Walgreens. These will not be the last.

And these announcements matter. Sure, they are likely to drive some incremental foot traffic. But, more importantly, the announcements are critical to breaking the mentality that “prices only go up.” If you are the Federal Open Market Committee (FOMC), that is welcome news. Maybe—finally—the inflation cycle is breaking in the parts that can be controlled. The FOMC is not going to break the inflation coming through the insurance channel. That is regulated and sticky, beyond the reach of interest rates. The FOMC breaking inflation at the grocery store is a victory it can relish.