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Consumers continue to spend despite inflation

28 July 2022

Companies will raise prices if they think consumers will pay them

Consumer-focused firms are seeing no shortage of demand despite the soaring cost-of-living, prompting several to upgrade sales forecasts for the current year, though questions remain about how long that will last, reported Reuters.

While some consumers are shielding themselves from price hikes by trading down to own label products, enough are spending more for McDonalds to risk lifting the price of a cheeseburger in Britain for the first time in 14 years on Wednesday.

In another example, US burrito chain Chipotle Mexican Grill Inc reported better-than-expected results on Tuesday and said it plans to raise menu prices again in August after a more than 4% increase in the second quarter. 

"Companies will raise prices if and when they feel consumers are willing and able to pay them," said Nuveen's Chief Investment Strategist Brian Nick. "It's become harder to do this in 2022 as wage growth slows and excess savings fall."

The global economy is mired in a serious slowdown, with some key economies at high risk of recession over the coming year, according to Reuters polls of hundreds of economists worldwide. 

"There is a real concern that demand may be weakening, which will make it hard to justify further price hikes," said Nick.

Shops and supermarkets in Britain increased prices by 4.4% in the 12 months to July, the largest rise since these records began in 2005, reflecting a jump in food and transport costs, the British Retail Consortium said on Wednesday. 

Consumer goods giants Reckitt Benckiser and Danone both lifted sales forecasts on Wednesday along with automaker Mercedes, healthcare firm GSK and sportswear firm Puma. 

Danone lifted its annual revenue growth forecast after second-quarter like-for-like sales beat analysts' estimates on strong demand for baby food and bottled water.

Like rival Unilever, Reckitt and Danone's price rises have driven revenue. The biggest question for investors is how long that will continue.

"What we've seen is that the consumer has accepted these price increases, but inflation is not pulling back," said Ashish Sinha, portfolio manager at Gabelli. "So as inflation increases, that raises questions on demand elasticity."

Kraft Heinz Co, maker of Philadelphia Cream Cheese and Heinz Ketchup, said on Wednesday its price hikes are largely on hiatus after quarterly volumes dipped on supply chain and demand woes.

Chief Executive Officer Miguel Patricio said about 99% of the intended price increases for the year have been announced, with a majority of these implemented, adding that any further pricing the company takes will be "surgical".

Source: Reuters



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