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Retailers are finally cutting prices. Will it last?

1 week ago 36

Consumers have been waiting for lower prices for what seems like forever. And now costs are finally going down. (Some of them, at least.)

After a years-long run up in prices that’s caused many to pull back on spending, things are finally beginning to get cheaper.

Ford recently marked down its electric Mustang Mach-E by 17 percent. Target is slashing prices on 5,000 items, including Persil laundry detergent by 5 percent, Clorox wipes by 14 percent and Purina One cat food by 17 percent. And at Walgreens, swim goggles and Squishmallows are discounted by as much as 40 percent.

Those markdowns, and the consumer spending slowdown that prompted them, mark a turning point in the post-lockdown economy, after the sharpest surge in inflation in decades.

New inflation data on Wednesday, the second day of a Federal Reserve Board meeting that starts Tuesday, will offer yet another snapshot of just how much prices have cooled. Although the central bank is expected to hold interest rates steady — as it has done since last summer — many are watching to see whether the Fed will begin cutting borrowing costs later this year or keep pressure on the economy in its fight against inflation.

Happy consumers mostly have themselves to thank: The price cuts are mostly due to shoppers pulling back on spending, contributing to a gradual slowdown in economic growth.

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“Retailers overreached when they started jacking up prices,” said Mark Cohen, director of retail studies at Columbia Business School. “Business has gotten stuck. Things are slowing down. Companies are waking up and realizing they have to start reducing prices.”

What do these markdowns actually mean? And are you likely to finally feel some relief at the checkout counter? Here’s what to know.

What’s actually getting cheaper?

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So far, it’s a mix of groceries and general merchandise including toys, beauty products and household goods like toilet paper at some of the country’s largest retailers. The consumer price index from a month ago showed that a range of everyday items — including staples like bread, milk and poultry, all got cheaper between March and April.

Some major retailers are taking sweeping steps. Ikea has lowered prices three times in the past year, while Best Buy has been marking down appliances. Arts and crafts chain Michaels says it’s slashing prices on 5,000 items including stickers, canvases and T-shirts.

Fast-food chains are also joining the fray. McDonald’s, Burger King and KFC have all announced new $5 meal options to entice budget-minded consumers.

“Americans across the country are making tough calls about where to spend their hard-earned money,” Joe Erlinger, president of McDonald’s USA, wrote in an open letter last month. “It’s clear that we — together with our franchisees — must remain laser-focused on value and affordability.”

Why is this happening now?

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Simply put, Americans have stopped buying as much — and retailers are trying to win them back.

Consumers have begun thinking twice about spending as they run out of extra pandemic savings. At the same time, the Federal Reserve’s aggressive efforts to raise interest rates have made it more expensive for Americans to finance purchases with credit. As a result, they’re pulling back on big-ticket items like homes, cars and washing machines, while also reconsidering smaller expenses like new shoes and fast food.

That means retailers are feeling the pinch. After a period of record-high sales and profits, many are struggling to keep customers and attract new ones. Their answer: Lowering prices.

Does this mean inflation is gone?

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Not quite. Most of the announced price cuts are on goods, such as cars, furniture, appliances, sporting goods and dairy products — all of which have already gotten cheaper in the past year, according to federal inflation data.

The part of the economy where prices are still rising too fast is in services, like housing, health care and insurance. Those have been much harder to bring down, in part because they rely so heavily on workers, who have recently gotten pay raises. Overall, prices are 3.4 percent higher than they were a year ago, though some services are still notching double-digit growth.

“It won’t affect inflation because inflation now is in housing, medical services and gas,” said Sucharita Kodali, a retail analyst for Forrester. “But it will impact perceptions of price when consumers shop in mass retail and that perception is what is most important.”

What does this mean for my next shopping trip?

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You might start to notice things are cheaper, but experts say it won’t happen all at once. Even if some items cost less, it’s possible others will cost more, leaving you with a similar tab at the checkout line.

“This will be a very gradual process that is not a straight line or linear or orderly,” said Cohen of Columbia. “Just when a consumer might see some relief in one place — ‘wow, my groceries cost less’ — they’ll likely encounter something else that is inflated. There’s so much that goes into how we experience inflation and the things we buy are just one part of it. It’s also your rent, your health bills, your electricity costs, tuition.”

What does this mean for the economy?

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The spate of lower prices, combined with slowing spending, suggests the economy is losing some steam after last year’s rapid momentum. That could create room for the Fed to start cutting interest rates by the end of the year. Some Wall Street economists say rate cuts could begin as early as September, especially if inflation continues its descent.

But the economy’s direction is still very much up in the air. Fresh jobs data on Friday showed that employers added 272,000 jobs in May — far more than expected — suggesting that growth is still running hot.

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