As prices rise, shoppers keep spending

The Fed's favorite inflation measure

The Personal Consumption Expenditure (PCE) rose 6.6% in March over the year period that ended in March, according to data released April 29 by the Bureau of Economic Analysis. This was the highest rate increase since the period ended January 1982, topping February’s uptick of 6.4%, CNN reported.

When removing food and energy costs, the increase for March 5.3%, which is down slightly from 5.2% in February.

The PCE, which is a measure of the value of goods and services purchased in the United States, is one of the tools used by the federal government to gauge inflation. It is watched closely by the Federal Reserve as it sets monetary policy.

This week, all economic eyes will be on the Fed as it decides whether to follow through on an expected interest rate hike of .5% at its meeting on Wednesday. (Economists think they will).

CPGs say Q1 demand is strong

With retail sales up 6.9% year-over-year in March, however, there were signs that price increases weren’t leading shoppers to immediately pull back. Recent earnings reports from some of the largest CPG companies confirmed this.

Procter & Gamble reported its highest sales growth in 15 years, per Reuters. Its fabric and home care unit was up 7%, while sales in its healthcare business grew 13%.

Unilever, which makes grocery and personal care items, reported that sales were up 7.3% in the first quarter. This came as it raised prices by over 8% as it offset supply chain and energy costs.

Nestlé, the food and beverage giant, reported a 5.4% increase in total sales. This came after it raised prices by 5%, and said more hikes were likely to come.

“We stepped up pricing in a responsible manner and saw sustained consumer demand,” CEO Mark Schneider said in a statement. “Cost inflation continues to increase sharply, which will require further pricing and mitigating actions over the course of the year.”

At confectionary maker Hershey, sales were up 16.1% in the first quarter, according to its earnings report. CEO Michele Buck said Easter season was especially strong for the company.

“Consumer demand for our products has remained resilient across categories and markets, despite rising inflation,” Buck told investors.

Even for Amazon, which reported its first quarterly loss since 2015 while detailing a number of cost challenges, there were no signs of consumer "softness," CFO Brian Olsavsky said on a conference call with analysts. He added that Amazon believes its selection and convenience stands out, and it will continue to work on shopper experience as it tracks how the inflationary environment influences available household income.

Consumer sentiment ticks up

In one sign of optimism for the near future, The University of Michigan Index of Consumer Sentiment recorded a month-over-month increase of 9.8% in April.

This was mainly the result of optimism for the near future. There was a 21.6% increase in a measure of the year-ahead outlook of the economy.

While there was an improvement over the last month, the University of Michigan points out that the sentiment over the last two months was still lower than any other month in the last decade.

Even with the sales growth in the first quarter, it remains a volatile economic environment. Longtime University of Michigan Surveys of Consumers Director Richard Curtin offered the following analysis:

“The downward slide in confidence represents the impact of uncertainty, which began with the pandemic and was reinforced by cross-currents, including the negative impact of inflation and higher interest rates, and the positive impact of a persistently strong labor market and rising wages. The global economy has added even more uncertainties about prospects for the U.S. economy, including the growing involvement in the military support for Ukraine, and renewed supply line disruptions from the covid crisis in China. Who would not be apprehensive about future conditions, even if on balance they anticipated a continued expansion?”

Whether that leads to what Curtin calls a “tipping point” for consumers, including a pullback in spending, remains to be seen. Leaders of consumer goods companies are watching closely.