By refusing to buy, US consumers rein in inflation

Even as the US Fed Reserve has been fighting the demon of inflation in the world’s largest economy by keeping the interest rates at an elevate level, the ordinary American seems to have done more than his bit to curb inflation. He has refrained from buying things which s/he felt were at a higher price range, and s/he tried to bargain hard and bring down the prices of goods which were essential.

This forced the retailers to bring down the prices, and businesses felt the pinch that they were not able to sell high-priced items because the consumers were not willing to spend that extra cent and extra dollar. The finding came out clearly in the US Fed Reserve’s “Beige Book”, which is an anecdotal business report brought out eight times a year from the 12 US Fed districts.

In its July report, It says, “Almost every district mentioned retailers discounting items or price-sensitive consumers only purchasing essentials, trading down in quality, buying fewer items or shopping around for the best deals.” The finding is supported by what David Gibbs, CEO of Yum Brands, which owns Taco Bell, KFC and Pizza Hut, had told investors that price-sensitive consumers had slowed down sales in the past year. He said, “Ensuring we provide consumers affordable options has been an area of greater focus for us since last year.”

This phenomenon has been witnessed in the online retailer Dormify’s sales of comforters, where the price had to be brought down from $99 to $69. Andrew Jassy, CEO of Amazon said, “We are seeing lower average selling prices…right now because customers continue to trade down on price when they can.”

It has been observed that the American consumer cooled inflation without getting the economy into a recession. It has been a balancing act, bringing the prices down by refusing to indulge in that impetuous buying spree, and yet buying enough, although at bargain prices, to keep the wheels of the economy going as it were.

This is indeed a revealing aspect of the economic behaviour of the people in changing a trend. Though there has been much talking about behavioural change as a key element in setting right many of the distortions, especially in matters concerning climate change, this is the first time that a spontaneous behaviour of the consumer has changed the economic trend.

This gives insight into the fact that American society, which is generally blamed for being an unabashed consumerist group, has managed to show the right amount of prudence and frugality. The American story is one of debt and indebtedness, especially because of the credit card phenomenon. But the American people have shown this admirable quality of keeping away from indulgence is a rare example.

This uncharacteristic frugality on the part of Americans could be due to the fact that there are not enough jobs around and the competition is so fierce that the salaries are reined in. This is the general trend with the major segments of the economy, whether it is manufacturing or the services. The exception is the tech sector with the explosion of AI applications and the computer techies needed to generate ever newer AI applications.

The fear has been that AI could affect jobs in manufacturing and services. It is this fear that is restraining American families from spending. The consumer restraint will have wider ramifications in the economy. The economists will now have to build their models factoring in the consumption patterns. If higher prices were to deter consumers from buying, then it would impact sales, and thus production. The need to keep prices at affordable levels becomes an imperative.