Some good news for the holiday season: shopping for gifts this year will probably be a bit cheaper than last year. The bad news? Consumers just aren’t feeling the holiday cheer – and with good reason.
After over a year of high inflation, prices in the US are starting to level out, with drops in prices of some goods. The cost of a dozen eggs went from an average of $4.83 down to an average of $2.07 this October. Gas prices surpassed $5 a gallon in summer 2022, and are now down to a national average of $3.30.
The price falls will also be felt by shoppers as they rake through Black Friday deals, which will be at “record highs” according to Adobe’s shopping forecast. Some toys, electronics, apparel and home goods are slated to be cheaper than this time last year.
“There are certain categories where retailers are pulling out all the stops to present good prices,” said Neil Saunders, managing director and retail analyst at GlobalData Retail. “Not through benevolence, but basically because they have to. Customers are very reluctant to spend, so they want to be stimulated by really great bargains.”
What should be good news for shoppers is worrisome for retailers, who are anticipating what could be a muted holiday shopping season as consumers start to pull back on spending.
Many retailers saw soaring profits during the pandemic as people shifted their spending away from experiences, like traveling and eating out, to consumer goods. But as the pandemic waned, people started to travel and go to concerts again. Other factors, like a slower job market and stagnating wages have overall left less room for shopping this year.
On its quarterly earnings call last week, Walmart’s chief executive, Doug McMillon, said the company is anticipating a “period of deflation in the months to come”. Walmart executives on the call listed specific price decreases. In toys, the Barbie Malibu Dreamhouse went from $89 to $69, the classic Furby doll is down to $49 from $59.
“While that would put more unit pressure on us, we welcome it because it’s better for our customers,” he said, noting that even the price of food, particularly dry groceries and consumables, could start to go down in prices.
Retail analysts have since interpreted Walmart’s earnings call as confirmation of what’s to come, the end of retail’s golden period of high prices and high spending. In 2022, Walmart saw its highest revenue yet, reporting $573bn for the year, up from $514bn in 2019.
In September, Deloitte released a report that predicts this holiday shopping season will be the slowest since 2018. While consumer spending is still predicted to rise between 3.5% to 4.6% over the holiday period, the increase is lower than rises seen in previous years. In 2022, holiday spending increased by 7.6%.
Given that consumer spending is the largest driver of the US economy, the slowdown could have real consequences. Since the pandemic downturn, hiring has remained robust, wages have risen and consumers have continued to spend – despite consistently reporting they are unhappy with the economy.
Some of that unhappiness is attributable to the still-high rate of inflation – a phenomenon Americans haven’t experienced in 40 years. So, while some things may seem cheaper, many prices are still considerably higher than they were before the inflation spike began. Even as the pace of inflation eases – inflation went from a decades-high of 9% in the middle of 2022 down to about 3% in the last few months – prices are still going up, just at a slower pace.
Economists believe prices going up at a slow pace is what keeps the economy healthy. That’s why the Federal Reserve has a target inflation rate of 2%, rather than zero or lower. Deflation, or prices going down, can actually lead to recessions as it slows economic activity.
While the period of super-high inflation is past, even if shoppers are getting better deals this year, that doesn’t mean they will be any happier. Everything is still more expensive than it was just a few years ago, particularly at the grocery stores.
Eggs, for example, are cheaper this year than last year, but they’re still about 50 cents more expensive than they were in 2019, according to the St Louis Federal Reserve. The price of a pound of ground beef, which has been steadily climbing over the last year, is $1 more than in 2019.
“For a lot of us, the low-inflation period is still fresh on our minds. Before the pandemic started, we had almost 10 years of basically zero inflation and near-zero interest rates,” said Joanne Hsu, an economics professor at the University of Michigan who runs the Surveys of Consumers, which tracks consumer sentiment on inflation. “There’s this underlying feeling of, since the pandemic started, we’re so far from the pre-pandemic normal.”
Even while inflation has been cooling this year, consumer sentiment has actually been getting worse over the last few months. Household expectations for inflation rose for the third month in a row in October, with consumers expecting inflation in the year ahead to rise to 3.8%, the highest expected rate since May 2023.
So while Black Friday deals are roaring at consumers, many are still stuck in the past.
“We’re collectively dealing with that, that the 2019 pre-pandemic normal is never coming back,” Hsu said. “Over time, those memories will fade of the prices in 2019. But right now, we’re still nostalgic for it, in a negative way.”