Americans’ rejection of higher prices could end the US inflation surge.

The recent surge in inflation witnessed over the past three years appears to be stabilizing, with many economists attributing this shift to the responsiveness of American consumers. Major corporations, including Amazon and Disney, have observed a notable change in consumer behavior; customers are increasingly opting for less expensive alternatives, actively seeking out bargains, or foregoing items they consider overpriced.

Rather than dramatically cutting back on spending, consumers seem to be adjusting their habits to resemble those from before the pandemic era. During that time, businesses found it challenging to increase prices significantly without losing customers. “While inflation is down, prices are still high, and I think consumers have gotten to the point where they’re just not accepting it,” remarked Tom Barkin, president of the Federal Reserve Bank of Richmond, at a recent conference. He emphasized that when consumers resist high prices, it acts as a natural remedy for inflation.

This shift in consumer attitudes has contributed to a gradual decline in inflation rates, moving closer to the Federal Reserve’s target of 2%. The relief from heightened prices has eased financial pressures on households, as many citizens have grown increasingly dissatisfied with how the Biden-Harris administration has addressed the economy, especially with inflation becoming a central issue in the upcoming presidential election.

The resistance among consumers to maintain spending at higher levels has compelled companies to either slow down price hikes or even reduce prices. This has played a significant role in alleviating inflationary pressures across various sectors.

Additionally, improving supply chains have resulted in greater availability of goods, including cars, meat, and furniture. Furthermore, the Federal Reserve’s decision to raise interest rates has cooled demand for big-ticket items such as homes and appliances, which are sensitive to interest rate fluctuations.

A critical concern moving forward is whether consumers will tighten their spending too dramatically, potentially endangering economic stability. Consumer expenditures represent over two-thirds of economic activity, and signs of a cooling job market suggest that decreased spending could have detrimental effects. Recently, stock markets experienced a sharp drop due to these fears, though they have since recovered.

This week, the government is set to release important data on inflation and consumer health. The consumer price index for July, due on Wednesday, is anticipated to indicate that core prices—excluding the often volatile food and energy sectors—rose by only 3.2% from the previous year. This figure would mark a decrease from the 3.3% reported in June and the lowest annual inflation rate observed since April 2021.

On Thursday, the release of last month’s retail sales figures is expected to show a moderate increase of 0.3% from June, suggesting that while consumers are becoming more cautious, they are still willing to make purchases.

Businesses have certainly noted these patterns. “We’re seeing lower average selling prices right now because customers continue to trade down on price when they can,” said Andrew Jassy, CEO of Amazon, reflecting on the shift in shopping trends.

Similarly, David Gibbs, CEO of Yum Brands—parent company to Taco Bell, KFC, and Pizza Hut—cited a more frugal customer base that has led to a 1% decline in sales at stores open for at least a year during the April-June quarter. “Ensuring we provide consumers affordable options has been an area of greater focus for us since last year,” Gibbs stated.

In some cases, companies have resorted to outright price cuts. Dormify, an online retailer specializing in dorm supplies, is selling comforters starting at $69, a notable decrease from $99 the previous year.

The Federal Reserve’s “Beige Book,” which compiles business insights from across the nation on a quarterly basis, has echoed these observations. Reports indicate that businesses in nearly all of the 12 Fed districts have experienced similar trends, noting that retailers are discounting items and consumers are prioritizing essential purchases or seeking out the best prices.

Most economists contend that consumers are still engaging in spending habits robust enough to support the economy. Barkin mentioned that businesses in his Federal Reserve district, which includes Virginia and parts of the Carolinas, report steady demand persistently tied to reasonable pricing.

Jared Bernstein, who leads the Biden administration’s Council of Economic Advisers, observed that consumer caution has played an integral role in steering inflation closer to the Federal Reserve’s targeted levels.

As consumers emerged from the pandemic with an influx of cash from multiple stimulus packages, they initially displayed limited sensitivity to price hikes. This change in behavior allowed some companies to increase their prices beyond necessary levels, contributing to inflation.

Barkin reminded that before the pandemic, price increases were relatively rare. The process of price comparison through online shopping had reinforced this trend, keeping prices down. However, the landscape shifted dramatically in 2021 due to persisting labor shortages and widespread supply chain issues, leading to an era of increased pricing visibility.

Isabella Weber, an economist at the University of Massachusetts, Amherst, referred to the resulting inflationary environment as “sellers’ inflation.” In her research, she noted that public acknowledgment of supply chain interruptions has lent credibility to higher prices, allowing companies to take advantage of consumer acceptance.

Today, however, consumers are less inclined to accept price hikes without question. “People have a little bit more time to stop and say, ‘How do I feel about paying $9.89 for a 12-pack of Diet Coke when I used to pay $5.99?’” Barkin noted, emphasizing a newfound scrutiny in consumer purchasing choices.

Looking ahead, many forecast that this consumer inclination towards careful spending will continue to temper price rises and aid in controlling inflation. “I’m actually pretty optimistic that over the next few months, we’re going to see good readings on the inflation side,” Barkin concluded, hopeful for more favorable inflation trends in the near future.