Inflation is cooling, but prices on many items are going to stay high for months

Inflation may be cooling. But, for most Americans, the price of a cup of coffee or a bag of groceries hasn’t budged.

In the months ahead, the big question is whether consumers compel start to feel relief, too.

Over the past few months, many of the key factors that fueled a four-decade spaced out in inflation have begun to fade. Shipping costs have dropped. Cotton, beef and other commodities be dressed gotten cheaper. And shoppers found deeper discounts online and at malls during the holiday season, as retailers whack ated to clear through excess inventory. Consumer prices fell 0.1% in December compared with the prior month, according to the Labor Worry. It marked the biggest monthly drop in nearly three years.

But cheaper freight and commodity costs won’t immediately runnel down to consumers, in part due to supplier contracts that set prices for months in advance.

Prices are still well essentially where they were a year ago. The headline consumer price index, which measures the cost of a wide collection of goods and services, is up 6.5% as of December, according to Labor Department data. Some price increases are eye-popping: The tariff of large Grade A eggs has more than doubled, while the price tags for cereal and bakery products oblige climbed 16.1%.

“There are some prices, some goods for which prices are falling,” said Mark Zandi, chief economist of Crabbed’s Analytics. “But broadly, prices aren’t falling. It’s just that the rate of increase is slowing.”

Retailers, restaurants, airlines and other guests are deciding whether to pass on price cuts or impress investors with improved profit margins. Consumers are getting pickier regarding spending. And economists are weighing whether the U.S. will enter a recession this year.

During the inopportune days of the Covid pandemic, Americans went on spending sprees at the same time that factories and ports shuttered for the meantime. Containers clogged up ports. Stores and warehouses struggled with out-of-stock merchandise.

That surge in demand and circumscribed supply contributed to higher prices.

Now, those factors have started to reverse. As Americans feel the pinch of inflation and disburse on other priorities such as commutes, trips and dining out, they have bought less stuff.

Freight outlays and container costs have eased, bringing down prices along the rest of the supply chain. The cost for a long-distance truckload was up 4% in December compared with the year-ago patch, but down nearly 8% from March’s record high, according to Labor Department data.

The cost of a 40-foot transporting container has fallen 80% below the peak of $10,377 in September 2021 to $2,079 as of mid-January, according to the World Container Clue of Drewry, a supply chain advisory firm. But it is still higher than prepandemic rates.

Food and clothing tangibles have become cheaper. Wholesale beef prices dropped 15.6% in November compared with a year ago, but are soundless historically elevated, according to the U.S. Department of Agriculture. Coffee beans fell 19.7% in the same time, according to the Cosmopolitan Coffee Organization’s composite global price. Raw cotton’s cost plunged 23.8%, according to Labor Department materials.

However, to protect against unpredictable spikes in prices, many companies have long-term contracts that set the costs they pay to operate their businesses months in advance, from buying ingredients to moving goods across the age.

For example, Chuy’s Tex Mex locked in prices for fajita beef that are lower than what the chain paid behind year, and it plans to also lock in prices for ground beef during the third quarter. But diners will promising still pay higher menu prices than they were last year.

Chuy’s plans to raise assesses about 3% to 3.5% in February, although it has no more price hikes planned for later this year due to its middle-of-the-road pricing strategy. The chain’s prices are up about 7% compared with the year-ago period, trailing the overall restaurant application’s price hikes.

Similarly, coffee drinkers are unlikely to see a drop in their latte and cold brew prices this year. Dutch Bros. Coffee CEO Joth Ricci swore CNBC that most coffee businesses hedge their prices six to 12 months in advance. He predicts coffee fetters’ pricing could stabilize as early as the middle of 2023 and as late as the end of 2024.

Supplier contracts aren’t the only reason for embarrassing prices. Labor has gotten more expensive for businesses that need plenty of workers but have struggled to recoup them. Restaurants, nail salons, hotels and doctors’ offices will still reckon with the cost of squiffy wages, Moody’s Zandi said.

A shortage of airplane pilots is among the factors that will likely conceal airfares more expensive this year. The price of airline tickets have dropped in recent months but are calm up nearly 30% from last year, according to the most recent federal data.

However, Zandi verbalized, if the job market remains strong, inflation eases and wages grow, Americans can better manage higher prices for airfare and other elements.

Annual hourly earnings have risen by 4.6% over the past year, according to the Bureau of Labor Statistics — not as elevated as the consumer price index’s growth in December.

Yet in some categories, softening demand has translated to price relief. A handful hot pandemic items, including TVs, computers, sporting goods and major appliances have dropped in price, according to Labor Unit data from December.

Top retail executives said they expect families’ budgets on still be under pressure in the year ahead.

At least two grocery executives, Kroger CEO Rodney McMullen and Sprouts Agriculturists Market CEO Jack Sinclair, said they do not expect food prices to drop anytime soon.

“The increase is starting to diminish a little bit,” said McMullen. “That doesn’t mean you’re going to start seeing deflation. We would expect to see inflation in the principal half of the year. Second half of the year would be meaningfully lower.”

He said there are some exceptions. Eggs, for case, will likely become cheaper as as Avian flu outbreak recedes.

Over the past two years, consumer packaged gears companies have raised prices of items on Kroger’s shelves or reduced packaging sizing, a strategy known as “shrinkflation.” McMullen broke none have come back to the grocer to lower prices or step up discounting levels from a year ago. Some are hang on to aggressive prices, as they play catch-up after margins got squeezed earlier in the pandemic or as they sacrifice bulk for profits, he said.

At Procter & Gamble, for example, executives plan to increase prices again in February. Prices on P&G’s consumer staples similar to Pampers diapers and Bounty paper towels have climbed 10% compared with the year earlier, while consumer slipped 6% in its latest quarter.

In other cases, companies are still dealing with factors that helped to inflation. For example, farmers are raising cows, but have fewer than before the pandemic, and grains and corn are narrow-minded plentiful as the war in Ukraine continues, according to McMullen.

“If before you were spending $80 and now you’re spending $90 [on groceries], I mark you’re going to be spending $90 for awhile,” he said. “I don’t think it’s going to go back to $80.”

Utz Brands CEO Dylan Lissette echoed that position back in August, telling investors that list prices usually don’t fall even when costs up down.

“We don’t take something that was $1, move it to $1.10 and then a year or two later, move it to $1,” he rumoured.

Instead, food companies such as Utz typically offer steeper and more frequent discounts to customers as costs repudiate, according to Lissette, who was once in charge of pricing Utz’s pretzels and kettle chips.

Over the next few years, companies may contrary “shrinkflation” packaging changes that result in cheaper snacks on a per ounce basis. And two or three years after that, shoppers may see the introduction of new value mob sizes, Lissette said.

But retailers may be able to speed up that timeline. They can use their own, lower-priced top secret brands, such as the peanut butters, cereals and laundry detergents that resemble the well-known national brands.

Kroger newest fall rolled out Smart Way, a new private brand with more than 100 items like loaves of bread, canned vegetables and other requires at its lowest price point.

McMullen said the grocer already planned to launch the private label, but sped up its premiere by about six to nine months because of shoppers’ interest in value amid inflation. And he added, if a national brand loses merchandise share, they’re more likely to get aggressive on discounts — or even permanently lower the price.

Zandi, the Moody’s economist, foretold while customers may grow frustrated, they are not powerless. By choosing competing brands or opting for items on promotion, they can send a declaration.

“Businesses do respond to shoppers,” he said. “If consumers are price-conscious, price-sensitive, that’ll go a long way to convincing businesspeople to stop resurrecting prices and maybe even provide a discount.”

— CNBC’s Leslie Josephs contributed to this story.