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Inflation’s cooldown slowed in January, as higher prices for shelter became a bigger driver of increases.
On Tuesday, the Consumer Price Index from the U.S. Bureau of Labor Statistics shared the following data on pricing for January 2023:
On a monthly basis, inflation rose 0.5%. This came after prices ticked up a narrow 0.1% in December.
On an annual basis, inflation rose 6.4% from the same month of 2022. While this is the smallest annual increase since October 2021, it is down only slightly from the 6.5% annual rate in December.
Core inflation, which leaves out volatile food and energy indices, rose 5.6% from a year ago, which was the smallest 12-month increase since December 2021. This was down from 5.7% in December.
Food inflation continued to rise, as four of six major categories recorded increases. The food at home index, which includes groceries, rose 11.3% on an annual basis. There was some moderation in this category, as it was down from 11.8% in December.
Notable price increases were observed in shelter, which drove the increase in core inflation. Apparel and household furnishings also saw prices tick up.
What’s the takeaway?
Stubborn inflation:After three months of pronounced cooling, inflation’s downward slope flattened in January. It’s just one month of data, but shows that the path to bringing prices down may not always be a smooth one.
Adding that inflation remains up 14.4% on a two-year basis, GlobalData Managing Director Neil Saunders said the report shows there is a "clear risk" that inflation will continue to dominate in 2023. This is being driven in part by continued spending, even in the face of higher prices.
"There have been some areas of modest improvement since last month, but most shoppers are still firmly in money-saving and budgeting mode," Saunders said. "One of the issues, however, is that despite some changes in behavior overall demand remains fairly strong. While consumers are cutting back at the margins, they are still spending which is not allowing the economy to cool and inflation to wither."
Economists have warned of the risk that inflation could rise again, even after it begins to descend. That’s not the trend being observed here, but the slowdown will get the attention of the Federal Reserve’s top committee as they weigh their next moves on interest rates.
Shelter rising: Inflation is also moving to other categories. For months, food and gas drove the Consumer Price Index increases. Food is coming down, while gas prices only increased 1.5% for the month. But now, it is shelter, which includes rent, that is proving to be a major factor in inflation. This could continue to impact discretionary spending, as people who are paying more for rent will try to save money in other areas.
Trending in Economy
Campbell Soup Company CEO Mark Clouse offered thoughts on messaging amid inflationary shifts in consumer behavior.
After months of elevated inflation and interest rate hikes that have the potential to cool demand, consumers are showing more signs of shifting behavior.
It’s showing up in retail sales data, but there’s also evidence in the observations of the brands responsible for grocery store staples.
The latest example came this week from Campbell Soup Company. CEO Mark Clouse told analysts that the consumer continues to be “resilient” despite continued price increases on food, but found that “consumers are beginning to feel that pressure” as time goes on.
This shows up in the categories they are buying. Overall, Clouse said Campbell sees a shift toward shelf-stable items, and away from more expensive prepared foods.
There is also change in when they make purchases. People are buying more at the beginning of the month. That’s because they are stretching paychecks as long as possible.
These shifts change how the company is communicating with consumers.
Clouse said the changes in behavior are an opportunity to “focus on value within our messaging without necessarily having to chase pricing all the way down.”
“No question that it's important that we protect affordability and that we make that relevant in the categories that we're in," Clouse said. "But I also think there's a lot of ways to frame value in different ways, right?”
A meal cooked with condensed soup may be cheaper than picking up a frozen item or ordering out. Consumers just need a reminder. Even within Campbell’s own portfolio, the company can elevate brands that have more value now, even if they may not always get the limelight.
The open question is whether the shift in behavior will begin to show up in the results of the companies that have raised prices. Campbell’s overall net sales grew 5% for the quarter ended April 30, while gross profit margins held steady around 30%. But the category-level results were more uneven. U.S. soup sales declined 11%, though the company said that was owed to comparisons with the quarter when supply chains reopened a year ago and expressed confidence that the category is seeing a longer-term resurgence as more people cook at home following the pandemic. Snacks, which includes Goldfish and Pepperidge Farm, were up 12% And while net sales increased overall, the amount of products people are buying is declining. Volumes were down 7%.
These are trends happening across the grocery store. Campbell is continuing to compete. It is leading with iconic brands, and a host of different ways to consume them. It is following that up with innovation that makes the products stand out. Then, it is driving home messaging that shows consumers how to fit the products into their lives, and even their tightening spending plans.
Campbell Soup is more than 150 years old, and has seen plenty of difficult economic environments. It is also a different business today, and will continue to evolve. At the end of the day, continued execution is what’s required.
“If it's good food, people are going to buy it, especially if it's a great value,” Clouse said.