Inflation has already peaked, but it will remain above pre-Covid levels in 2023, said David Mann, chief economist for Asia-Pacific, Middle East and Africa at the Mastercard Economics Institute.
“Inflation has seen its peak this year, but it will still be above what we had been used to pre-pandemic next year,” Mann told CNBC’s “Squawk Box Asia” on Friday.
It’ll take a few years to return to 2019 levels, he said.
“We do expect that we go back down in the direction of where we were back in 2019 where we were still debating how many countries needed negative interest rates.”
Central banks around the world have been hiking interest rates as recently as November in response to high inflation.
They include central banks from the Group of 10 countries — such as the U.S. Federal Reserve, the Bank of England and the Reserve Bank of Australia — as well those of emerging markets, such as Indonesia, Thailand, Malaysia and the Philippines, Reuters reported.
The Fed will hold its December policy meeting this week, where it is expected to hike interest rates by 50 basis points. The central bank has raised rates by 375 basis points so far this year.
“Inflation has become that big challenge. It’s been spiking and staying very high,” Mann said. But he warned that it would be risky if central banks end up hiking rates more than they need to.
“The challenge is if you’ve lost orientation of where the sky and the ground is, you’re not quite sure where you need to end up,” Mann said.
It would be a “serious scenario” if central banks “end up going slightly too far and then need to reverse relatively quickly,” he added.
Consumer spending
Despite high inflation, Mann said, U.S. consumers are still willing to engage in discretionary spending in areas such as travel.
Travel recovery in the U.S. is strong and people are still choosing to spend on experiences rather than material goods, Mann said.
And they are being frugal about their spending on necessities in order to be able to afford non-essentials, he added.
“There is something in the back of people’s minds that worries them that even though it’s not very likely, it’s still possible that those [Covid] restrictions [will] come back,” he said.
Treasury Secretary Janet Yellen said Thursday in an exclusive interview with CNN that she did not see signs of a recession in the near term as the US economy rebounded from six months of contraction.
During a one-on-one interview in Ohio that aired on CNN’s “Erin Burnett OutFront,” Yellen said the third quarter GDP data released Thursday underscored the strength of the US economy as policy makers urgently move to cool off pervasive and soaring inflation that has had a sharp effect on American views of the economy – and endangered the Democratic majorities on Capitol Hill less than two weeks from the midterm elections.
“Look, what we’re seeing right now is solid growth this quarter. Growth has obviously slowed following a very rapid recovery from high unemployment,” Yellen said when asked about whether the latest GDP data assuaged any recession concerns. “We’re at a full employment economy. It’s very natural that growth would slow. And it has over the first three quarters of this year, but it continues to be OK. We have a very strong labor market. I don’t see signs of a recession in this economy at this point.”
Yellen’s optimism comes amid growing concern from economists and finance officials that a recession is likely at some point in the next year, but was based in part on elements of the latest data that showed signs a necessary slowdown in key areas of the economy leaves open a pathway to a “soft landing” as the Federal Reserve prepares to continue its rapid pace of rate increases.
Gross domestic product — the broadest measure of economic activity — rose by an annualized rate of 2.6% during the third quarter, according to initial estimates released Thursday by the Bureau of Economic Analysis. That’s a turnaround from a decline of 1.6% in the first quarter of the year and negative 0.6% in the second.
But Yellen’s view also underscored the complex balancing act President Joe Biden and his top economic officials have attempted over the course of this year, as they seek to highlight a rapid economic recovery and major legislative victories while also pledging to tackle soaring prices.
“Inflation is very high – it’s unacceptably high and Americans feel that every day,” Yellen said when asked how the administration squared its view of the US economy with soaring discontent among voters. Yellen acknowledged that the prices would take time to recede, saying the efforts to bring it back down to levels “that people are more accustomed to” will likely cover “the next couple of years.”
It’s a reality that has undercut efforts by the administrationto take advantage of what officials view as a robust record. Biden, asked about the economy last week, told reporters it’s “strong as hell,” drawing criticism from Republicans.
But Yellen agreed with the President’s assessment that the economy remains strong, standing out in comparison to how other economies around the world are fairing.
“If you look around the world, there are a lot of economies that are really suffering not only from high inflation but very weak economic performance, and the United States stands out. We have unemployment at a 50-year low. … We saw in this morning’s report – consumer spending and investment spending continued to grow. We have solid household finances, business finances, banks that are well capitalized,” she said.
She added, “This is not an economy that’s in recession and we continue to do well.”
Yellen also acknowledged frustration inside the administration that the efforts to pull the US economy out of crisis haven’t received the credit officials believe is merited.
“There were several problems that we could have had, and difficulties many families American families could have faced,” Yellen said. “These are problems we don’t have, because of what the Biden administration has done. So, often one doesn’t get credit for problems that don’t exist.”
Yellen traveled to Cleveland as part of an administration push to highlight the major legislative wins – and the tens of billions of dollars in private sector investment those policies have driven toward manufacturing around the country.
It’s a critical piece of an economic strategy designed to address many of the vulnerabilities and failings laid bare as Covid-19 ravaged the world, with significant federal investments in infrastructure and shoring up – or creating from scratch – key pieces of critical supply chains.
Listing off a series of major private sector investments, including the $20 billion Intel plant opened a few hours drive outside of Columbus, Yellen said they were “real tangible investments happening now,” even as she acknowledged they would take time to full take effect.
Yellen pledged that those efforts would be felt as they course through the economy in the months and years ahead. Asked if the administration’s general message to Americans was one of patience, Yellen said: “Yes.”
“But you’re beginning to see repaired bridges come online – not in every community, but pretty soon. Many communities are going to see roads improved, bridges repaired that have been falling apart. We’re seeing money flow into research and development, which is really an important source of long term strength to the American economy. And America’s strength is going to increase and we’re going to become a more competitive economy,” she said.
Yellen also addressed the battle lines that have been drawn this week over raising the debt ceiling, a now-perpetual Washington crisis of its own making that House Republicans have once again pledged to utilize for leverage should they take the majority.
“The President and I agree that America should not be held hostage by members of Congress who think it’s alright to compromise the credit rating of the United States and to threaten default on US Treasuries, which are the bedrock of global financial markets,” Yellen said.
But Yellen, who has long highlighted the “destructive” nature of the showdowns, has also backed doing away with the debt limit altogether through legislation. A group of House Democrats wrote to Democratic leaders to request that action in the lame duck session of Congress, but Biden rejected the idea this week.
Asked about the split, Yellen said only that she and Biden agreed that it’s “really up to Congress to raise the debt ceiling.”
“It’s utterly essential that it be done, and I’d like to see it occur in the way that it can occur,” Yellen added.
As the administration moves toward a time period that traditionally leads top officials to leave an administration, she made clear she did not plan to be one of them. Asked about reports she had informed the White House she wanted to stay into next year, Yellen said it was “an accurate read.”
“I feel very excited by the program that we talked about,” Yellen said. “And I see in it great strengthening of economic growth and addressing climate change and strengthening American households. And I want to be part of that.”
confirmed Monday it is laying off roughly 3,000 white-collar and contract employees, marking the latest in its efforts to slash costs as it makes a longer-range transition to electric vehicles.
Ford sent an internal email Monday to employees, saying it would begin notifying affected salaried and agency workers this week of the cuts. The email was viewed by The Wall Street Journal.
The 1% reduction in Ford’s workforce of about 183,000 mostly targets employees in the U.S., Canada and India. About 2,000 of the targeted cuts will be salaried jobs at the Dearborn, Mich., auto maker. The remaining 1,000 employees are working in contract positions with outside agencies, the company said.
The cuts weren’t unexpected. The Wall Street Journal and other media outlets reported in July that layoffs were coming for white-collar staff as part of a broader restructuring to sharpen the car company’s focus on electric vehicles and the batteries that power them.
Ford shares closed down 3.9% each on Monday, after news of a $1.7 billion jury verdict in a case involving a rollover accident with one of the company’s F-250 pickup trucks that left two people dead.
The company’s email, signed by Executive Chair
Bill Ford
and Chief Executive
Jim Farley,
said Ford is changing the way it operates and redeploying resources as it embraces new technologies that weren’t previously core to its operations, such as developing advanced software for its vehicles. The job cuts are effective Sept. 1, a spokesman said.
“Building this future requires changing and reshaping virtually all aspects of the way we have operated for more than a century,” the internal message said.
Mr. Farley has said recently that Ford has too many employees, and that the existing workforce doesn’t have the expertise needed to transition to a portfolio of electric, software-laden vehicles.
He has said he aims to cut $3 billion in annual costs by 2026 as part of his goal to reach a 10% pretax profit margin by then, up from 7.3% last year.
Like many global auto makers, Ford is pouring money into electric vehicles in an effort to close the sales gap with
Tesla Inc.
The company has said it would spend about $50 billion through 2026 to develop EVs, targeting global sales of two million by then.
Mr. Farley earlier this year divided the company into separate divisions, including one to focus on electric vehicles and advanced technologies, and another to handle its traditional internal-combustion-vehicle lines.
He has said profits from its lineup of gasoline and diesel-engine vehicles will help fund the transition, but that part of the business must operate more efficiently.
Supply-chain issues and a shift toward electric vehicles have accelerated changes in the car-buying process. We visit a car dealer to see how consumers and sellers are adapting and what changes might be here to stay. Photo: Adam Falk/The Wall Street Journal
Morgan Stanley is urging investors to resist putting their money to work in stocks despite the market’s post-Fed-decision jump.
Mike Wilson, the firm’s chief U.S. equity strategist and chief investment officer, said he believes Wall Street’s excitement over the idea that interest rate hikes may slow sooner than expected is premature and problematic.
“The market always rallies once the Fed stops hiking until the recession begins. … [But] it’s unlikely there’s going to be much of a gap this time between the end of the Fed hiking campaign and the recession,” he told CNBC’s “Fast Money” on Wednesday. “Ultimately, this will be a trap.”
According to Wilson, the most pressing issues are the effect the economic slowdown will have on corporate earnings and the risk of Fed over-tightening.
“The market has been a bit stronger than you would have thought given the growth signals have been consistently negative,” he said. “Even the bond market is now starting to buy into the fact that the Fed is probably going to go too far and drive us into recession.”
‘Close to the end’
Wilson has a 3,900 year-end price target on the S&P 500, one of the lowest on Wall Street. That implies a 3% dip from Wednesday’s close and a 19% drop from the index’s closing high hit in January.
His forecast also includes a call for the market to take another leg lower before getting to the year-end target. Wilson is bracing for the S&P to fall below 3,636, the 52-week low hit last month.
“We’re getting close to the end. I mean this bear market has been going on for a while,” Wilson said. “But the problem is it won’t quit, and we need to have that final move, and I don’t think the June low is the final move.”
Wilson believes the S&P 500 could fall as low as 3,000 in a 2022 recession scenario.
“It’s really important to frame every investment in terms of ‘What is your upside versus your downside,'” he said. “You’re taking a lot of risk here to achieve whatever is left on the table. And, to me, that’s not investing.”
Wilson considers himself conservatively positioned — noting he’s underweight stocks and likes defensive plays including health care, REITs, consumer staples and utilities. He also sees merits of holding extra cash and bonds at the moment.
And, he’s not in a rush to put money to work and has been “hanging out” until there are signs of a trough in stocks.
“We’re trying to give them [clients] a good risk-reward. Right now, the risk-reward, I would say, is about 10 to one negative,” Wilson said. “It’s just not great.”
Woman on her back pushing shopping cart in supermarket aisle
David Espejo | Getty Images
Experts are weighing the odds as to how likely a recession is and how fast it could come upon us.
Most Americans — 70% — already believe an economic downturn is on its way, according to a new survey from MagnifyMoney. The online survey was conducted between June 10 and 14 and included 2,082 respondents.
A recession is defined as a significant economic decline that lasts more than a few months.
The biggest recession warning sign, which 88% of respondents pointed to, is high inflation.
Respondents also reported seeing signs of an economic downturn in housing and rent prices, with 61%; rising interest rates, 56%; the stock market, 55%; declines in consumer spending, 42%; and rising unemployment, 36%.
Some of those perceptions may lean on how people feel about the economy, rather than hard numbers. While the U.S. economy still has bright spots — including a strong overall job market and rising wages — higher prices have raised Americans’ feelings of financial insecurity, according to Matt Schulz, chief credit analyst at LendingTree, which owns MagnifyMoney.
“When something as fundamental to people’s every day lives as gas prices and grocery bills goes sky high, it really has a huge impact on the way people look at things,” Schulz said.
New inflation data expected to be ‘highly elevated’
Forthcoming inflation data could further fuel consumer’s feelings of concern.
The Consumer Price Index, which measures the average change in prices over time for certain goods and services, climbed 8.6% in May from the previous year, the highest increase since 1981.
New data for June is slated to be released on Wednesday.
“We expect the headline number, which includes gas and food, to be highly elevated, mainly because gas prices were so elevated in June,” White House press secretary Karine Jean-Pierre said during a Monday press briefing.
However, those June numbers are already out of date because energy prices have since fallen substantially, she said.
“The President’s number one economic priority is tackling inflation,” Jean-Pierre said. “And looking ahead, there are a number of reasons why we expect those high prices to ease over the coming months.”
What people are doing to prepare for a recession
The biggest worry people citied about a looming recession is the inability to pay their bills, with 44%, according to the MagnifyMoney survey.
In order to prepare for a downturn, many are focused on keeping their spending in line — 62% of respondents said they are cutting back on spending, while 39% are sticking to a budget. Those steps can be important in the event of a job loss or other financial setback, experts say. Others are building emergency savings, with 26%.
MagnifyMoney respondents also reported taking steps to shore up their income streams, with 24% working a side gig and 6% improving job performance. Another 6% reported adjusting their investment portfolio.
Meanwhile, 11% of respondents said they are doing nothing.
Reducing debt can have a ‘significant’ effect
There are proactive steps individuals can take now to get themselves in a better financial position, according to Schulz.
One in 4 respondents in the MagnifyMoney survey reported paying down debt as a way to get their finances ready for an economic downturn. As the Federal Reserve raises interest rates, people may want to consider their options to control their personal interest rates on their debts, he said.
More from Personal Finance: 65% of Americans earning $100,000 or more are ‘very concerned’ about inflation 5 steps you can take now to financially prepare for a recession 3 ways to deal with inflation, rising rates and your credit
For those with good credit, a 0% transfer credit card can by “very, very helpful,” Schulz said.
For those who don’t have good credit, a low interest personal loan may help reduce the interest you’re paying on your balances.
By calling the issuer for a current credit card, you may be able to negotiate a lower rate. That has worked for about 70% of people who have asked in the past year, according to Schulz.
“Any of those moves can reduce your rates significantly more than the amount that the Fed is raising them by on a monthly basis, so it can be a really significant thing,” Schulz said.
U.S. electricity customers are facing some of the largest bills in years because of volatile natural-gas prices, which are being driven higher by winter demand and a global supply shortage being made worse by Russia’s war against Ukraine.
Already, the natural-gas supply crunch has made it substantially more expensive for utilities to purchase or produce electricity. As a result, some customers have seen winter power bills increase by 20% or more compared with the year before, in addition to seeing higher home-heating bills.
Now, with sanctions against Russia threatening to further constrain global natural-gas supplies, higher prices are likely to persist, executives and analysts say, especially in regions heavily reliant on the fuel for power generation.
Domestic natural-gas prices reached the highest levels in years ahead of winter as exporters shipped record amounts of it overseas, and prices have lately risen again on fears of another global shortage.
“It will have an impact on customers’ bills,” said
Nick Akins,
chief executive of
American Electric Power Co.
AEP -0.58%
, a utility company that serves more than five million customers in 11 states.
U.S. Henry Hub gas prices on Friday reached about $4.73 per million British thermal units. That is up from about $2.66 per million British thermal units a year ago.
Utilities across the country recover gas and electricity supply costs by charging them to customers, driving prices sharply higher this winter after a year of steady increases. Average retail electricity prices for residential customers rose 4.3% last year to 13.72 cents per kilowatt-hour, the largest annual increase since 2008, according to the Energy Information Administration. The increase, which generally matched inflation overall, was spurred in part by the cost of natural gas delivered to power plants, which more than doubled from 2020.
SHARE YOUR THOUGHTS
What has your electricity bill been like lately? Join the conversation below.
Utilities must receive regulatory approval to raise rates, but it is generally standard practice for regulators to allow for them to recoup higher fuel and supply costs through customers.
The recent surge in electricity prices has been especially acute in New York.
Consolidated Edison Inc.,
ED 0.20%
which provides electricity to about 3.3 million customers in the New York City region, said city residents using about 300 kilowatt-hours a month saw their January bills increase by roughly 23%. Most of that increase resulted from higher supply costs.
ConEd said it is working to hedge against price volatility and adjusting its billing processes to benefit customers.
Hector Ruiz, 44 years old, a fiber-optic engineer who has lived in his house in Clifton Springs in upstate New York for the past eight years, said he had never paid more than about $500 a month for gas and electricity. His bill last month was just shy of $1,000, he said, scrambling the budget for his family of four and prompting him to tap into funds set aside for other purposes.
Hector Ruiz said his latest bill for gas and electricity was just under $1,000, which is double what he was paying.
Photo:
Malik Rainey for The Wall Street Journal
“My utility bill literally doubled overnight,” Mr. Ruiz said. “Has it been a punch to the gut? Yes.”
Gabriel Thompson, 40, a photographer who lives with his wife in Westchester County just north of New York City, saw his electricity bill rise sharply alongside his gas bill in January. His cost of electricity supply reached 18 cents a kilowatt-hour that month, up from about 6 cents a kilowatt-hour the prior month. Including delivery charges, he paid more than $200 for electricity and about $585 for natural gas.
“It makes me glad I don’t have an electric car, which I’d love to have,” Mr. Thompson said. “People don’t have infinitely expendable income.”
The increases come amid broader concerns about high inflation. The consumer-price index surged 7.9% in February, the highest rate in 40 years.
Gabriel Thompson says higher utility costs make him glad he doesn’t have an electric car.
Photo:
Clark Hodgin for The Wall Street Journal
Eversource Energy,
ES -0.53%
a utility that serves 3.6 million electric and natural-gas customers in Connecticut, Massachusetts and New Hampshire, raised electricity rates at the start of January to account for higher wholesale prices. The company said an average residential customer could see bills increase by as much as 25% through the end of June.
James Daly,
Eversource’s vice president of energy supply, said regional pipeline constraints exacerbated a gas-supply shortage resulting from higher seasonal demand and relatively flat domestic production. The company also saw a surge in prices for liquefied natural gas as exporters shipped more of it abroad, though it doesn’t rely heavily on that type of fuel.
“We can see prices run up faster than in other parts of the country if there’s a supply-demand imbalance,” Mr. Daly said.
Commodity prices are hot right now. But the prices investors are paying in the open market for commodities like coffee, copper or corn can have little to do with the price customers pay at the store. WSJ’s Dion Rabouin explains. Illustration: Adele Morgan
In California, wholesale power prices have risen as the state’s largest utilities plan to invest billions of dollars to reduce the risk of their power lines igniting wildfires. San Diego Gas & Electric, a unit of
Sempra
that serves about 1.5 million electric customers and 900,000 natural-gas customers, raised rates at the start of the year to account for higher supply costs. Average residential bills increased by 11.4%.
Guggenheim analyst Shahriar Pourreza said utilities have long counted on low gas prices to keep supply costs down, giving them greater leeway to invest in their systems without major rate increases. Now, with gas prices likely to remain elevated, companies will face more pressure from regulators to keep spending in check and consumers’ bills lower, Mr. Pourreza said.
“You haven’t seen the same level of inflation in utility bills like you’ve seen in other industries and other products,” he said. “It’s been a subsidy for them, and that subsidy is likely going away.”
The recent surge in electricity prices has been especially acute in New York. A street in Mount Vernon.
Photo:
Clark Hodgin for The Wall Street Journal
Write to Katherine Blunt at Katherine.Blunt@wsj.com
Chase Smith had been saving for her first car long before she had a license to drive. But when the 16-year-old was ready to buy, she saw the prices and hit the brakes.
“It was definitely very frustrating, especially because all my friends have cars,” said Ms. Smith, who was eager to end her one-hour bus trips to school in upstate New York and stop catching rides from her parents. “But in the end, I just know it’s a smart decision,” she said.
Buying a used car, or receiving one from parents, has long been a rite of passage for generations of young drivers in the U.S. Skyrocketing prices and a shortage of preowned inventory are adding new strains to a teen’s initiation into the driving world, prompting some shoppers to delay purchases and others to stretch their budgets.
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Used-car prices were rising before the pandemic hit, but in the past two years, they have consistently hit more records as supply-chain disruptions have slammed the auto industry, leading to a shortage of cars new and used.
The average listing price for a preowned model hit $28,500 in January, a 31% jump over the same prior-year month, according to Cox Automotive. Comparatively, new-vehicle prices rose 12% during that same time frame, the firm’s data shows.
The surge has walloped price-sensitive buyers, especially younger ones, who have reliably turned to the used-vehicle market for more-affordable options, analysts say.
The number of 16-to-25-year-olds purchasing a used vehicle dropped 35% between 2019 and the end of 2021, more than for any other age group, according to data provided by research firm J.D. Power.
Purchases of new cars also have slipped for this age group over the past couple of years, the firm’s data shows.
While Gen Zers had been showing more interest in automobiles before the health crisis, they are now being held back by the rising prices and paltry selection of low-cost vehicles, analysts and industry executives say.
“As an industry, I think there should be some concern,” said Jack Hollis, senior vice president of auto operations at Toyota Motor North America.
Capturing younger buyers, who will be the driving force behind the economy in the next 20 to 40 years, is critical for the car business because it ensures brand loyalty and a future customer base, Mr. Hollis added.
An employee shows a used vehicle to potential buyers in Jersey City, N.J., early in the pandemic.
Photo:
Angus Mordant/Bloomberg News
At current price tags, the average monthly payment on a financed used car was about $540 last month—up 33% from $407 in January 2020 and close to what some consumers would have paid on a new vehicle two years ago, according to Edmunds.
Meanwhile, earnings for teenagers haven’t kept pace. In roughly the same period, the median wage of workers ages 16 to 19 increased 14.6% to about $2,453 a month at the end of last year, according to the Bureau of Labor Statistics.
Even parents, who in many cases assist with the purchase or buy the car outright for their teens, are balking at the higher prices.
Bradley Rose, a father living in Florida, said he was run ragged driving the kids around to events and clubs. He was eager to get a car for his 16-year-old daughter to lighten the load.
SHARE YOUR THOUGHTS
Have you bought or sold a used car this year? Join the conversation below.
He found dealership lots near empty and had trouble finding a vehicle around his $10,000 price limit. A pilot, Mr. Rose said he considered flying cross-country to find a low-cost vehicle, before finding a used 2016 Toyota Corolla LE that had 50,000 miles on it. He said he paid about $19,000 for the car.
“It’s way overpriced, but we wanted her to be happy; we wanted her to be safe,” Mr. Rose said.
For decades, car companies tried to appeal to this demographic by selling cheap, entry-level models, such as compact sedans and hatchbacks. Some, such as
Toyota Motor Corp.
, had youth-oriented brands that offered small cars priced at under $20,000.
In recent years, many brands have dropped their budget models from showrooms, as car manufacturers shifted to selling more higher-priced trucks and SUVs. That trend has left budget-minded buyers, including teens and young adults, turning to used-car offerings, analysts and auto executives say.
Now they are finding the pickings are slim even there.
The availability of used vehicles has grown scarce over the past two years, in part because the typical channels for restocking lots have also faced challenges. Rental-car firms are holding on to their vehicles longer because they can’t secure new ones, and fewer leased cars and trucks have returned to dealerships for resale in the used market.
While preowned inventory levels are starting to bounce back, the supply on dealer lots in December was still down nearly 20% from the same time in 2019, according to Cox Automotive. For those looking for a used car under $10,000, there were only about 8,500 available in the entire U.S. in January, a 34% decrease from April 2021, the firm’s data shows.
The challenges are resulting in disappointment for parents and teens.
Marc Levine, a father of two living in Florida, was hoping to help his 16-year-old son buy his first set of wheels, as he did with his older child. When he saw the elevated prices, he decided to hold off, telling his son that it was risky to buy at the top of the market.
Lettuce Entertain You Enterprises Inc., a Chicago-based restaurant group, has added a 3% “processing fee” to checks at many of its restaurants.
Harley-Davidson Inc.
added a charge last year to its motorcycles to cover rising material costs.
Peloton Interactive Inc.
in January began charging $250 for delivery and setup of some of its indoor bikes, a service that was previously included free.
Companies are finding all kinds of ways to make consumers pay for rising costs. Often that is not reflected in the posted price.
The Labor Department’s consumer-price index, which measures how much consumers pay for goods and services, rose to 7.5% in January compared with the same month a year earlier—the biggest rise since February 1982.
The index accounts for some changes that raise consumers’ costs, such as smaller package sizes and some fees attached to hotel packages or car purchases. But it can miss other ways in which dollars don’t stretch as far– a hotel that changes sheets only between guests, a theme park that cancels its free airport shuttle, or an auto dealer that requires customers to buy a protective paint coating with a car.
With supply-chain challenges, pent-up demand and a tight labor market leading to inflation, businesses are looking for subtle ways to pass along rising costs. Particularly in the food business, companies have long used what the industry calls weight-outs, or shrinking package contents instead of raising prices, during economic distress periods such as the 2007-2009 recession.
“There is a lot more to come,” said
Doug Baker,
head of industry relations for FMI, a food-industry trade organization. “Everything is on the table in an effort to deal with those cost increases, and at the same time, not make it too difficult for consumers to shop.”
A global computer-chip shortage has reduced vehicle inventories just as Americans were buying cars in record numbers, pushing up prices for new vehicles. In many cases, they are selling for thousands of dollars above manufacturers’ suggested retail prices, said Tom McParland, founder of Automatch Consulting, which helps consumers find vehicles.
“They’re calling it a market adjustment fee,” said Mr. McParland. “That’s the new thing they are doing: hiding markups with substantially overpriced accessories like mud flaps and cargo protectors.”
Ford Motor Co.
and
General Motors Co.
have said they are cracking down on dealerships using that tactic.
Harley fees
Base prices on Harley-Davidson’s motorcycles haven’t gone up much in recent years, the Milwaukee company said. But to cover rising costs, it added a mandatory materials surcharge last year, which dealers are passing on to customers. Dealers said the fee, which varies based on the model, is easier for the company to adjust than base motorcycle prices when costs decrease.
Dealers said the fee is $850 to $1,500 a bike. Harley this week told analysts that the surcharges helped boost revenue during the fourth quarter last year.
Harley-Davidson added a fee to its motorcycles to cover rising material costs; a dealership in Louisville, Ky., this week.
Photo:
Luke Sharrett/Bloomberg News
Some restaurants are adding new fees in response to escalating costs for food and packaging, and for wage increases executives say are needed to keep cooks and servers.
Brinker International Inc.’s
Maggiano’s Little Italy in October 2020 started charging $5 for a second, to-go pasta dish offered as part of a two-entree deal. For about a decade before the pandemic, the chain had offered a second classic pasta dish free.
“We’ve had no push back,” Maggiano’s president Steve Provost told investors last October. A Brinker spokeswoman said the price change allowed the company to invest more in the value of its carry-out offerings.
When Michael Pfeifer, a marketing professional, picked up the check for his meal at
RPM
Seafood in Chicago this week, he was surprised to find a 3% Covid surcharge added to the bill. “What’s next?” he said. “A dishware rental fee?”
The fee, added in the spring of 2020, offsets the cost of pandemic-related government regulations and mandates, said RJ Melman, president of Lettuce Entertain You, which owns RPM. “These fees can be removed and refunded for any guest that requests,” he said, “no questions asked.”
Peloton, according to its website, is adding the new $250 fees on bikes and a $350 delivery-and-setup fee for some of its treadmills. It cut the price of its original stationary bike in August to $1,495 from $1,895. With the added fees, the total price is now back up to about $1,745, as the company dealt with slowing demand and its own rising costs.
Peloton declined to comment on the fees. In an earnings call on Tuesday, Peloton CFO
Jill Woodworth
said that the fees could cut into consumer demand but that they were part of a “critical learning” process as the company restructures and cuts costs for the post-pandemic era.
Walt Disney Co.
’s Disney World in Orlando stopped offering free airport shuttles—known as the Magical Express—this year, leaving Disney guests to pay for their own transportation. The parks added several fees last year while keeping the base ticket price at $109. A fast-pass system that let park guests make reservations for rides, which used to be free, was discontinued and replaced by a new system that costs $15. And some popular rides, like Star Wars: Rise of the Resistance and Space Mountain, now cost between $7 and $15, on top of the park admission ticket.
Disney offers “a wide range of options to match different budgets and interests,” said Disney spokesman Avery Maehrer.
At its theme-park restaurants, Disney is trying to avoid across-the-board price increases, Disney CFO
Christine McCarthy
told analysts in November. “We can substitute products. We can cut portion size, which is probably good for some people’s waistlines,” she said. “But we aren’t going to go just straight across and increase prices.”
Consumer backlash
Consumer pressure has led some companies to back off added fees, including
Frontier Group Holdings Inc.
The airline, which uses a la carte pricing that lets frugal travelers choose to forgo amenities, in May 2021 added a $1.59-per-flight-segment Covid-related fee. After consumer backlash, Frontier in June stopped breaking it out as a component of its base fare but it didn’t stop charging it. Frontier didn’t respond to requests for comment.
In a press release it said: “The charge, which was included in the airline’s total promoted fare versus an add-on fee, was meant to provide transparency and delineate what portion of the fare was going toward COVID-related business recovery.”
Some of
Marriott International Inc.’s
Autograph Collection hotels had been charging a “sustainability fee” of about $5 a night. The company that manages the properties, Innkeeper Hospitality Services LLC, says it covered things like more-efficient HVAC systems.
They stopped charging the fee several weeks ago, “because we understand that while we believe in environmentally responsible stewardship, not everyone cares about our planet’s health,” IHS CEO Amrit Gill said. He said Marriott had asked the company to stop charging the fee. Marriott declined to comment.
The Biden administration has begun to look into some forms of hidden fees, which it calls “junk fees.” The administration says the amount being charged is not always tied to the costs faced by the company providing the goods or services. The Consumer Financial Protection Bureau is seeking public input on financial services, such as bank overdraft fees, while the Transportation Department is planning actions on airline baggage fees.
John Fiorello, a father of four in Torrington, Conn., was dismayed to see prices rising in his local grocery-store aisles but was initially pleased to see that the blocks of cheese he usually buys hadn’t gone up much in price—perhaps 10 cents, he said. Then he noticed that the package had shrunk, to 12 ounces from 16.
“I picked up the block and said, ‘this is definitely smaller,’ ” Mr. Fiorello said. “It just adds an extra layer of stress.”
Shrinkflation, as economists call it, tends to be easier for companies to pass on to consumers. Despite labels that show price by weight, research shows that most customers look at only the overall price.
The food industry has long shrunk package contents instead of raising prices during economic-distress periods; a Salt Lake City grocery store in October.
Photo:
George Frey/Bloomberg News
“There are sizes that people remember, like a half gallon of ice cream,” said John Gourville, a Harvard Business School professor. “Once you break from iconic sizes, it’s pretty easy to move from 13 ounces to 12 ounces.”
Over the years, tuna cans have come to contain less tuna and toilet-paper rolls less tissue, said
Burt Flickinger III,
managing director of Strategic Resource Group, a consulting firm that works with consumer-product companies. “Historically,” he said, “it’s called a ‘cheater pack.’ ”
Companies have become more sophisticated and use multiple tactics to protect their profitability, he said. They can pull back on discounts, stop making low-selling products and create new varieties that sell for higher prices
Downsized Oreos
Oreo-maker Mondelez International Inc. raised prices by an average of 6% to 7% in the U.S. last month, but it wasn’t enough to make up for its higher costs, the company said. So Mondelez has been introducing new sizes and flavors it says are more profitable.
Oreo’s new 110th Birthday chocolate confetti-cake cookies cost about 10 cents more than regular Double Stuf Oreos at several grocery stores, even though the new flavor comes in a slightly smaller package. At a
Target Corp.
store in Chicago, the limited-edition birthday Oreos, which came out January, cost $3.79 for a 24-cookie package and the Double Stuf ones cost $3.69 for a 30-cookie package.
Retailers set the final prices. Mondelez said it charges the same for the two products, and its limited edition flavors are typically different-sized packages than regular ones. A Target spokesperson said: “We’re priced competitively throughout the markets we do business.”
Economists and analysts at the Labor Department’s Bureau of Labor Statistics monitor prices of thousands of goods and services. They can account for shrinkflation, because they track the cost of certain products by weight and quantity—so a cereal box that costs the same amount but now has 30% less volume would be registered as a price increase.
They said their efforts can’t identify every fee or dropped amenity, such as a hotel room rate that remains the same but that no longer includes fresh towels or a hot breakfast. “We do not capture the decrease in service quality associated with cleaning a room every two days rather than one,” said Jonathan Church, a BLS economist.
Disney World in Florida added several fees last year while keeping the base ticket price at $109; the Magic Kingdom last summer.
Photo:
Joe Burbank/Orlando Sentinel/Associated Press
Jeremiah Mayfield and Carlos Larrea stayed at Alohilani Resort in Honolulu in December and opted for a $75 a-night upgrade to “club level” for free food and drinks. But they said they could rarely use it because the resort didn’t have enough staff to replenish the club-level amenities. After complaining, they were offered free dinner.
Alohilani General Manager Matthew Grauso said that quality and efficient guest service are top priorities and that he tries to remedy any shortfalls immediately, adding, “The pandemic has presented a unique set of challenges within the hospitality industry.”
“We gave them hell for it,” Mr. Mayfield said. “We paid $800 a night. We never expected it would be so scarce in terms of service and amenities.”
Many hotel chains are replacing complimentary hot breakfast buffets with a snack bag. Some fitness centers and pools remain closed, and housekeeping doesn’t refresh rooms daily. Some guests feel like they are getting less for their money.
InterContinental Hotels Group
PLC, which owns Holiday Inn, said it has been working with hotels to return amenities and make it right if guests aren’t satisfied. “Hotel teams have been overcoming many challenges including supply chain and labor shortages, changing health guidance and regulatory requirements,” an IHG spokesperson said.
On a recent trip to St. Louis, Meg Hinkley booked a Holiday Inn because it said online that it offered room service. When she arrived, the restaurant was closed, so there was no room service. She said she would have stayed at a lower-priced hotel if she had known. “I was paying for that convenience.”
—Heather Haddon and Bob Tita contributed to this article.
Write to Annie Gasparro at annie.gasparro@wsj.com and Gabriel T. Rubin at gabriel.rubin@wsj.com
Your car may be more valuable than what’s in your portfolio.
Used auto prices are rising faster than bitcoin and other assets, according to market researcher Jim Bianco.
“If you want to know what the best investment you probably had in 2021, it’s that car sitting in your driveway or in that garage,” the Bianco Research President told CNBC’s “Trading Nation” on Thursday. “It is appreciating faster than the stock market and lately faster than some cryptocurrencies.”
He’s building his analysis based on the Manheim index of used car prices, which is designed to track pricing trends in the market.
“In the last four months, they’ve gone up in price more than 20%. Not only is that more than the S&P, but over the last four months that’s more than bitcoin itself,” he said. “As of December 15, the latest set of data we’ve got, they’re just accelerating higher and higher right now. There’s no peak at least as of now.”
Bitcoin is up about 5% over the past four months based on Thursday’s stock market close. The S&P 500 is up 26% so far this year.
Bianco cites two bullish drivers in the used car market. The first is those getting priced out of new cars due to the semiconductor shortage.
Kelley Blue Book reports auto prices are at record highs. In November, the average price for a new car cost $46,320 and used ones hit $27,569, a 27% increase than the same time last year.
The second: Speculators who want to flip vehicles.
“What we’re seeing in used cars is a rush for people to buy them, and a rush for people to speculate on them,” he noted. “Buy it now because it’s only going to get more expensive.”
‘Tell-tale signs of a bubble’
It’s clearly not your parents’ auto market.
“It has all the tell-tale signs of a bubble,” he said. “Used car prices are supposed to be a depreciating asset. They’re not supposed to go up in price. Yet, this year they’ve gone up in price 49%, call it 50%.”
Bianco suggests auto price sticker shock reflects a bigger problem.
“This is exactly what they [Federal Reserve] don’t want to see happen because this is that self-reinforcing idea about inflation,” he noted.
Last December on “Trading Nation,” Bianco warned 2021 may mark the first inflation comeback in a generation.
He believes inflation will decrease in 2022, but its descent will be a lot slower than most people think. As for a peak in auto prices, Bianco suggests it’s anyone’s guess.
“This could go on for another year. It could go on for two more weeks,” Bianco said. “The activity that you’re seeing is probably bubblicious.”
Institutional Investor hall of famer Rich Bernstein is a market bull whose playbook excludes some of Wall Street’s most popular groups.
He blames a risky see-saw dynamic playing out in the marketplace.
“On one side, we have all that I would call the bubble assets: tech, innovation disruption, cryptocurrencies,” the Richard Bernstein Advisors CEO and CIO told CNBC’s “Trading Nation” on Friday. “On the other side of this see-saw, you have literally everything else in the world. I think if you’re looking at 2022 into 2023, you want to be in the everything else in the world side of that see-saw.”
Bernstein believes a scarcity of capital will spell opportunities.
“That’s where your returns are higher,” he said.
His number one pick is energy, a group he listed as a top play coming into 2021. Earlier this year, Bernstein called oil the most ignored bull market. And now, he believes it could be the growth group of 2022.
The Energy Select Sector SPDR Fund, which tracks the group, is already up 51% so far this year.
In a special note to CNBC, Bernstein wrote “The last time the FCF [free cash flow] yield for the energy sector was this high relative to either the market or the Tech sector was around the Tech Bubble, and energy outperformed for a decade. The sector’s dividend yield is >3X the S&P 500’s dividend yield.”
Bernstein, who ran strategy at Merrill Lynch, warns today’s “bubble assets” could dramatically hurt investors just like the early 2000s.
“Valuations are very high and what you have to remember is the valuation is more important than the story,” he said.
He acknowledges stories told about the internet and cellular communications during the 2000 tech bubble became a reality over the next decade. But it took years to collect the profits.
“If you invested in the Nasdaq 100, which were the real companies at the time, it took you 14 years to break even,” said Bernstein. “Something tells me that the people today are not paying attention to valuations, but also aren’t thinking it’s going to take them 14 years to break even.”
Crypto as a ‘monster’ bubble
Bernstein also sees cryptocurrency as a major problem. Last June on “Trading Nation,” he warned the rush to own bitcoin and other cryptocurrencies was becoming dangerously parabolic.
“Cryptos are the biggest financial bubble ever in history,” said Bernstein. “This is just a monster one.”
As of Friday’s market close, bitcoin is off about 30% over the past month. It’s still up 63% so far this year.
Bernstein speculates bitcoin could fall as much as 90% just like some tech stocks during the 2000 bubble.
“I think one wants to wait to look at the true fundamentals, and look at the valuations before deciding that this is all over,” Bernstein said.
