This is going to be an incredibly expensive Christmas, but shoppers don't seem to care as much
(CNN Business) -- If you're shopping for Christmas you've probably noticed that prices have gone up on groceries, basics, appliances, fast food and all kinds of consumer goods. Inflation in the United States is at a high in more than a decade.
That means 2021 will be one of the most expensive Christmas shopping seasons ever. But buyers aren't holding back just yet. Companies are confident that they will continue to pay higher prices, especially during the year-end holidays.
They had better be right: If consumers decide to cut spending, the US economy could be in big trouble.
It's the economy, stupid!
Despite a global supply chain crisis, a resurgence of Covid-19 cases, and high inflation, the US economy remains in pretty decent shape. Consumers aren't spending as much as they did in the spring, when they still had oodles of money to spend from their stimulus checks, but they continue to open their wallets, albeit for some smaller purchases.
Consumer spending rose a healthy 0.6% in September after growing 1% in August, the Bureau of Economic Analysis reported on Friday. But the report came with some red flags: Large purchases of durable goods (think cars and appliances) fell 0.2%, while spending on other nondurable items rose 0.9%, mainly because prices of food and gasoline are going up.
Albertsons and other chains expect consumers to pay higher prices without much resistance.
That suggests consumers are willing to keep spending, even when prices rise. But they might be holding back on some higher value items.
The good news is that the delta variant appears to be on the decline, at least for now. Consumers could start venturing out again towards the end of the year if the trend continues. And automakers are reporting that the supply chain crisis has eased, seriously reducing inventory, which could help push car prices down a bit and lead to some solid year-end buying. , maybe some fancy cars with bows on top for holiday gifts.
However, if an unforgettable December awaits us, consumers will have to continue to deal with higher prices.
Merry Christmas to the shops
Economists and retail chains are confident that consumers will continue to spend over the holidays. With higher wages and many jobs waiting to be filled, Americans have money to spend this Christmas, even if prices are higher.
"As the delta wave recedes, consumer spending is on the rise, with the latest data showing higher hotel occupancy and restaurant visits," said BMO senior economist Sal Guatieri.
People are going back to work and wages continue to rise along with inflation. They have also accumulated savings during the pandemic, which will give shoppers and stores a tailwind heading into the holidays, according to Guatieri.
"Holiday sales look to be very strong this year ... if stores can find enough workers to deliver them," he said.
Retail sales in November and December are expected to grow between 8.5% and 10.5% this year compared to the 2020 holiday season, to a record high of up to $859 billion, the National Federation of Retailers said on Wednesday. Retailers, a trade group of retailers. The figure excludes car dealerships, gas stations and restaurants.
"All we're hearing from consumers we talk to on a regular basis is that they're excited about the holiday season," Target Chief Executive Brian Cornell said in an interview with Yahoo Finance on Monday. "We certainly expect to see a very strong and solid holiday season."
However, supply chain challenges remain a huge factor that could derail the holiday season. Even Amazon and Apple are grappling with the global supply chain crisis.
Both companies reported earnings results Thursday that missed Wall Street analysts' expectations and warned that supply chain issues could hit business in the December quarter.
Shipping delays mean that the supply and demand scales will continue to be out of balance. As his economics professor told you, that means that prices will continue to rise until the end of the year.
Higher prices are "well received by customers"
However, companies are also confident that, with supply tight and demand red-hot, they have pricing power over customers and can pass on the skyrocketing costs they face to customers.
"Consumers are paying higher prices because there are limited opportunities to buy other goods," said Gus Faucher, chief economist at PNC. "If your dishwasher breaks and you need a new one, and there are few dishwashers, you are willing to pay a premium. The same goes for household products like cleaners, toothpaste or toys. That allows companies to raise prices" .
Procter & Gamble, Whirlpool, Coca-Cola, McDonald's and Albertsons have all said in recent days that customers aren't changing their buying habits, even as prices rise. They believe that consumers are in good financial shape and can afford to pay higher prices without too much resistance.
"We haven't seen a material change in customer behavior. And I think it speaks to the strength of the customer," Albertsons CEO Vivek Sankaran said on an earnings call earlier this month. "We don't see their intent changing drastically over the next few weeks and months."
McDonald's raised menu prices 6% recently, and the chain's chief financial officer, Kevin Ozan, said in an earnings conference call Wednesday that the increase "has been pretty well received by customers."
But there are dangers for businesses and the broader economy if prices go too high, as some customers may punish them by switching to lower-cost products or cutting back on spending. Brands can also suffer if they get their prices wrong. In 2019, when Clorox raised the prices of Glad trash bags, retailers revolted and reduced shelf space for Glad, reducing sales.
"If inflation persists at a high level and is stronger than wage growth, that would make consumers more cautious with their spending," said PNC's Faucher. "They have to eat out less and go to the movies less. Instead of buying meat, they're going to buy ground beef."
