Although the US may have overcome its inflation problem, consumers don't seem to act like it. Based on a closely watched survey from the University of Michigan, spending is increasing at a comparable rate as it did last year while the majority of Americans anticipate no change in their financial situation or a worsening of it. The strength of price elasticity will be driven to its limit by lingering restraint.
Budgets for households are now able to withstand the dramatic cost increases. According to the latest data from the US Bureau of Labor Statistics, which were issued on Thursday, average weekly salaries have increased by 3.5% over the previous 12 months, outpacing the 3.2% increase in price during that time. But the rate of growth in shopping has not been as rapid. Through June, spending increased by a meager 2.4%, almost equaling the increase from the previous year. Researchers from Capital Economics noted in July that the 2.1 trillion dollars that Americans accumulated during the COVID-19 pandemic has already been used up, indicating a slowdown through 2024.
The trend shouldn't be a problem for companies that produce household staples. In the second quarter, sales of products made by Procter & Gamble such as Pampers, Tide, and other brands decreased by 1%, but the 7% price increases more than offset the decline. Similar to this, PepsiCo, which increased the pricing of Tropicana orange juice, Mountain Dew, as well as other drinks by 14% in North America, cost the 4% drop in its quarterly sales. Sales of Mondelez International rose 2% in Canada, America and Mexico despite a 10% price increase due to consumers' strong demands for Oreos and Wheat Thins.
Indulgences are going to suffer when consumers spend more to fill their pantry shelves. The sales of Darden Restaurants, owners of eateries such as Capital Grille and Olive Garden, were down 1.9% April to June from the previous year. Ricardo Cardenas, the chief executive, issued a warning that price sensitivity would hurt more. Laxman Narasimhan, the CEO of Starbucks, similarly gave an alert that the company's pricing strengths would deteriorate. Luxury behemoths Kering and LVMH reported slower US sales growth for the entire quarter since inflation restrained consumer interest in handbags and champagne.
Strange things happen. For instance, summer travel is a big expense for Americans. The North American hotel prices and occupancy of Marriott International increased by only 4% and 1%, respectively, in the three months leading up to June, while Delta Air Lines and United Airlines reported record earnings.
The purse strings might loosen if salaries keep rising faster than inflation, as they did in June and July. The 26-month period of declining purchasing power was broken by the recent upswing, though. For a while longer, Americans will likely be more frugal about discretionary purchases as long as necessities continue to increase in price.