Thinking About Today's Inflation Numbers

Remember The Armchair Economist?

Steven Landsberg, a professor of Economics, wrote this book in 1993 (can’t really be 29 years ago, can it?). If you haven’t read it, think of it as a forerunner to Freakonomics (now celebrating its 17th birthday). I have always remembered a passage in The Armchair Economist in which Prof. Landsberg tells of an economist friend of his who, when asked what interest rates were going to do, would become thoughtful, steeple his fingers, nod sagely, and pronounce, “I think interest rates will…fluctuate.”

I’m not an economist, I don’t even play one on TV (in the event that you do not know, the original source for that saying was a commercial from 1986). (1986!) But I would like to venture some ill-informed thoughts on the inflation numbers that came out today.

As reported in CNN: “Inflation surged in June, with US consumer prices jumping by 9.1% year-over-year. Much of the June increase was driven by record-high gas prices.” Inflation is obviously a concern and Fed actions certainly reflect that, but I’d still like to unpack this a little bit.

Consumer prices have jumped 9.1%. We’ve all been watching the year-over-year number since January, and I think we can all agree that’s a number that should give us pause, especially when looking at the preceding months. The media like to report numbers that have a certain shock value—it’s the business of news. 9.1% inflation is a great attention grabber, and it happens to be 100% accurate (unless USBLS revises it, which won’t move it much, anyway). It’s a really good grab when your subhead indicates that this number is the worst in 40 years. Business of news aside, that’s a serious number.

Much of the increase was due to record high gas prices. Yeah, Energy inflation YOY is 41.6% (yikes!) with gas (all types) up 59.9% YOY. That increase is driven by gas prices certainly checks out. If you’re in the media biz, then this number is a gift. People are jumpy about gas prices, they see it at the pump, so it has immediacy, and has got to help with capturing the eyeballs. And, again, it’s perfectly true. But maybe worth a closer look.

Gas prices in June hit $4.55 per gallon. Compare that to the July 2008 number of $4.11 and we are in record territory. It might be worth remembering that those are nominal prices and the comparison does not take into consideration that 14 years have passed since then. On an inflation-adjusted basis, the 2008 number is $5.48 per gallon, which means that, in real terms, gas is still a buck cheaper than in 2008. So…record territory? Sort of?

And here’s why I shouldn’t have written the last paragraph and why it is (mostly) irrelevant. In terms of impact on consumer behaviors, the real number vs nominal number doesn’t matter. The thing that drives consumer behaviors is their perception of that number, and other CPI inputs as well. From a media perspective, touting gas prices as the highest ever may color that perception. A bigger factor, however, is probably that consumers at the gas pump don’t have to stretch their memories very far to get to when gas was about $2.00 less per gallon. I think there’s solid basis for consumer perception that gas prices are high.

But how are consumers shifting spending decisions right now? How does that compare with what they did in 2008? (An uncomfortable tangent: during the great recession, one of the categories that saw decreased sales was: diapers. Who saw that one coming?) What are our best guesses as to what they might do in the future? (I believe consumers’ behaviors will…vary). 

Fewer trips.  Probably means lower impulse purchases because there will be fewer purchase occasions. Outlet choice is more likely to be influenced by proximity and/or the ability to source more of the consumer’s total needs from one visit. That sounds like good news for mass and club and maybe bad news for specialty stores. It almost assuredly means that consumers will visit fewer outlets—reducing the number of providers in their portfolio.

That’s all pretty intuitive, but there’s a devil lurking in the details: who are we looking at when we talk about changing behaviors? From a retailer perspective, which are the shoppers I most want to retain? What are their behaviors? Do they vary by demographics and region (spoiler alert, they do)? Does satisfaction with the shopping experience at a retailer drive outlet selection? Among certain consumer segments, it sure seems to. 

Depending on which retailer you are, and who you most want to retain as customers, a price play may be less strategic than a shopper satisfaction play. Thet’s not the lever that gets pulled first most of the time. 

Big, aggregated numbers mask important details. Rather than getting into a panic because of national, or even regional, numbers, it’s more important to answer the most basic questions: who am I to my shoppers? In a time when tough choices need to be made, which shoppers are critical to me (and the answer, all of them, is a non-answer). What are the tactics that YOUR shoppers (the ones that are critical to you) are using in a time of change? Rather than fighting those behaviors, how can you adjust your value proposition to reflect your shoppers’ needs? 

The great news is that the exercise in the preceding paragraph should be the most fundamental in determining a retailer’s go-to-market strategy regardless of how inflation…fluctuates.