Consumer goods are becoming more expensive

Procter & Gamble increases prices on items such as Pampers and Tampax in September. Kimberly-Clark announced in March that it would raise prices for Scott toilet paper, huggies and pull-ups in June, a move “necessary to offset significant raw material cost inflation”.

And General Mills, which makes brands like Cheerios, is facing increased supply chain and freight costs “in this higher demand environment,” the company’s CFO Kofi Bruce said on a call with analysts.

These price hikes reflect what some economists are calling a fundamental shift in the way companies responded to demand during the pandemic.

Before the virus broke out, retailers often bore the costs when suppliers raised goods prices as intense competition forced retailers to keep prices stable. The pandemic has changed that.

It created chaos and confusion in global shipping markets, resulting in bottlenecks and price hikes that stretched from factories to ports to stores and consumers. When the pandemic broke out, Americans’ shopping habits quickly changed – people were spending money on treadmills and office furniture instead of going to restaurants and watching movies in the cinema.

This in turn put enormous pressure on factories in China to produce these goods and ship them in containers across the Pacific. But the demand for shipping exceeded the availability of containers in Asia, creating bottlenecks that resulted in higher shipping costs.

The consumer price index, the measure of the average change in prices paid by US shoppers for consumer goods, rose 0.6 percent in March, the largest increase since August 2012, according to the Bureau of Labor Statistics.

Higher costs don’t just affect the US. UK inflation hit 0.7 percent in March, driven by oil and clothing prices.

At the start of the Covid-19 crisis, companies focused on responding to the surge through panic buying by getting people to stock up on items like toilet paper, cleaning supplies, canned food and masks, said Greg Portell, a partner at Kearney, a consulting firm. The government was on the lookout for price gouging and customers were wary of being taken advantage of.

“When the pandemic first hit paper, toilet paper was like gold,” Portell said. “The look of accepting a price increase during this time would simply not be good.”

Thus, despite the surge in demand, companies were unable to balance the price-cost equation. Now that the economy is beginning to stabilize, companies are starting to do other economic calculations, rebalancing pricing to better match their profit expectations and taking inflation into account, which will drive prices higher.

“This is not an opportunistic corporate profit-taking,” said Portell. “This is a market reset.”

The government’s pumping of money through the recent stimulus packages has also given retailers more leeway to raise prices. People who have received unemployment benefits or economic checks can spend that money on consumer goods such as toilet paper and diapers.

Many of those who kept their jobs during the pandemic were also able to increase their savings. That means they have disposable income that they can spend on more expensive items like printers or desks to work at home, or on luxury items like televisions, hot tubs, or kitchen remodeling.

“At the moment the demand is fiscally stimulated and very strong,” said Gregory Daco, US chief economist at Oxford Economics. “So even if you raise your prices, you will not necessarily lose market share because most other manufacturers are doing the same and because people have the means to buy.”

It is likely that retailers, from wholesalers to grocery stores, will pass most of the increased costs on from suppliers to consumers.

“Consumption will likely be very heavy over the next few quarters, which will give companies a little more pricing power to push through some of those cost increases that they might otherwise have had to absorb in their margins,” said Tim Drayson, director of economics at Legal and General Investment Management, an asset management company.

However, companies must continue to keep price increases reasonable and in line with competition.

“Companies tend to pass on what the consumer can take,” said John Ruth, CEO of Build Asset Management, an investment advisory firm. “You will notice some price increases, but your hamburger won’t double on your favorite local freeway.”

Price increases for commodities like toilet paper and diapers will hit low-income Americans the hardest and will put an additional burden on those already severely affected by the pandemic.

Whether the increased prices will stay or eventually decrease is controversial among economists. Some predict that prices will normalize within a year or two as the economy continues to pick up pace, the labor market improves and those who lost their jobs during the pandemic increasingly return to work.

“People are not going to buy used cars forever, or even new cars,” said Daco. “At some point the demand will be saturated, and that will be the beginning of a reduced-price environment.”

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