In June, consumer price growth slowed to its lowest level in more than two years. However, a boost to consumer spending isn’t as obvious a positive for US retailers.
Concerns lurk over what would happen to companies’ revenue as inflation slows down because retailers typically achieve growth by increasing prices for customers as raw costs rise.
The New Hurdle For US Retailers
A Goldman Sachs team of analysts who specialize in retail and consumer brands said during a media roundtable on Wednesday that the solution to that conundrum relies on the shop and the variety of products it carries.
According to the inflation report released on Wednesday, June saw the weakest increase in domestic food costs since August 2021.
Even some categories experienced a drop. Prices for basic foods like milk and eggs are now less expensive than they were 12 months ago.
According to Goldman analysts, this will make it harder for food businesses to increase sales by raising prices.
According to Goldman’s estimate, Target (TGT), which sells certain food, offers 40% consumable goods and 60% discretionary.
The retailer issued a “softness” warning for its discretionary segment last quarter. But according to McShane, the halt in price growth might be able to help with the issue.
The hope is that some of the money that is released from food would return to discretionary spending, so I can’t help but assume that Target is a little thrilled that this inflation is slowing down, McShane said.
Read more: Energy Prices Aid In Inflation Control, Down 16.7%
Prices Rarely Decrease After Significant Inflation
Retail inflation may be stickier elsewhere. McShane pointed out that it’s unlikely that the cost of vehicle parts and home improvement products will decrease.
Additionally, even when inflation decreases, suppliers to retailers can keep raising their prices. Jason English, managing director at Goldman Sachs, covers firms like Kraft Heinz (KHC), General Mills (GIS), and Campbell Soup (CPB).
He pointed out that historical research shows prices for packaged items rarely decrease following periods of significant inflation.
Read more: Americans Brace For Extended High Inflation