Consumer companies are confronting inflation pressures at every turn. Costs for raw materials and commodities are rising, as are shipping and wage rates. In this environment, efforts to operate lean can only do so much. For many companies, protecting margins inevitably means passing costs to the customer.
A confluence of signals, however, suggests there’s little room for raising prices. Globally, inflation concern is spiking. Consumer financial sentiment is flashing warning signals. And perhaps more importantly, people believe companies are being predatory—using this moment of historic inflation to raise prices beyond their own rising operating costs. Trust is eroding, and it’s likely to come at a cost. Consumers who believe companies are charging unfair prices have weaker spending intentions compared to those who do not.1
While consumers might be more accepting of higher prices when they’re driven by pandemics and wars, their patience around corporate greed looks to be thin.
Getting a handle on price elasticity hasn’t been easy for companies navigating an unfamiliar postpandemic environment. A testament to the uncertainty, views on pricing have split the consumer industry right down the middle. In a recent Deloitte survey of executives at consumer packaged goods companies, roughly half felt they could continue to raise prices without materially affecting demand.2 Half believe they can’t.
Figuring out which side is right isn’t easy. On one side, the number of consumers perceiving higher prices for groceries, clothing, and other categories has grown for eight months unabated (figure 1). On the other, consumer demand has generally remained stable. Even in countries with strong inflation like the United States, for example, retail sales are up 6% year over year.3 Restaurant spending is up nearly 20%.4 And travel spend is also on the mend, only lagging 6% behind 2019 prepandemic levels.5
Financial sentiment data from Deloitte’s Global State of the Consumer Tracker, however, suggests consumer demand may be more fragile than some might expect—particularly when exploring some of the finer elements of inflation like trust.
As the cost of living soars, consumers across the world are voicing louder concerns. Globally, an estimated 75% are now concerned about rising prices for everyday purchases—a figure that’s climbed from 66% since September 2021 (figure 2).
Concern around inflation does vary a bit around the world. Generally, concern tends to be more prevalent in countries with higher inflation. Sitting on opposite ends of the spectrum, Japan and Spain offer good perspective. In Japan, where inflation has historically remained low (for instance, just 0.9% in March), only half of the adult population (56%) is currently voicing concern. In Spain, where the Consumer Price Index hit 9.8% in March, concern is just about ubiquitous (88%).
Consumer businesses should expect consumers to be alert and responsive to price changes and should remain cautious about the price elasticity available in the market.
As inflation perceptions rise, some financial sentiment metrics have started flashing warning signals. After hovering around 40% across most of the two-year pandemic period, the number of consumers concerned about their level of savings jumped to 52%.6 Concern around credit card debt increased from 37% to 45%.7
While the uptick in savings and credit card concern is perhaps not strong enough to suggest consumers’ finances are crumbling in the face of inflation, they indicate clear signs of tension, particularly considering the timing of the trends. In some countries such as the United States, the signals are even stronger. In April, 35% of Americans cited concerns about making upcoming payments, jumping from 29% in March. Among lower earners, this figure hit nearly half (45%) (for more details, read From one financial challenge to the next).
Consumer sentiment around inflation goes beyond mere concern. When prices are rising as much as they have been, perceptions of fairness can come into play. While consumers may not react favorably to higher prices, people’s willingness to pay might be stronger when they feel costs are being driven by factors such as pandemics—higher prices are more likely to be perceived as unavoidable, something we all must live with.
But that’s not how most consumers are thinking. Globally, slightly over half (54%) feel companies themselves are also at fault—by raising prices beyond their own rising operating costs in an attempt to increase profit (figure 3).
There’s a clear lack of trust brewing. Whether or not businesses are charging unfair prices is irrelevant. What matters is that people believe it’s happening. And that’s an important factor for companies to consider.
Unfair pricing sentiment is correlated with weaker spending intentions. Controlling for factors such as age and income, consumers who believe companies are taking advantage plan to spend less across several categories in the month ahead (figure 4). Spending cuts are focused on more discretionary categories—including recreation and entertainment, leisure travel, restaurants, and even some less discretionary categories, such as clothing and personal care. These categories could represent areas where demand will struggle to hold up should inflation pressures continue mounting.
The inflation outlook remains highly debated and mired in unknowns. The ongoing conflict in Eastern Europe, policy changes around oil and natural gas imports, interest rate hikes, and persisting pandemic lockdowns could all have a hand in shaping inflation in the months to come.
For consumer businesses, the ability to pass rising costs on to the customer only looks to become more challenging. And while today’s price elasticity breaks some companies’ historical models8—businesses should consider the moment when the majority of consumers no longer blame the pandemic and war but rather the companies themselves. The data suggests demand and customer retention are at risk—particularly for products and services consumers may feel they can “do without.”
Beyond the first line of defense of targeted pricing actions, organizations should pull a number of other levers to help effectively manage margin erosion in the medium and long term.
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