Easing inflation unlikely to move the needle at retail

What it means: While inflation levels are improving across the board, consumer sentiment and non-essential spending may lag behind in their recovery at retail. One key concern across the retail industry heading into this year was the potential decline of the economy and its impact on overall consumer sentiment. Many factors have contributed to that overall picture for the consumer, including inflation, interest rates and debt balances. While key metrics like inflation continue to improve, other unexpected obstacles such as the regional banking crisis keep consumers on edge overall. The Bureau of Labor Statistics (BLS) released the Consumer Price Index for March, highlighting that inflation once again receded, with overall inflation now at 5%, the lowest level since 2021. While this is a great indication of the direction of price increases, other factors are still at play, including the response by the Federal Reserve and looming increases of interest rates. Even as prices stabilize, it still costs much more for consumers to borrow money or pay down debts, impacting their ability to save and use discretionary income. Consumers aren’t likely to feel the positive impact for some time, just as price increases slowly developed during the past year, and the retail industry may not feel pressure ease until next year. Another facet of the inflationary stabilization is that it’s not equally distributed across retail sectors. While they decreased compared to February, food-at-home prices were up more than 8% versus the last year, which outpaced total inflationary levels. Similarly, new car prices and rental costs grew slightly. For consumers, seeing price increases on both small- and large-ticket purchases won’t help spur consumer demand at retail. Perceived inflation levels at grocery retailers and supermarkets have also continued the trend of growing private label penetration. According to numbers released by the Private Label Manufacturers Association (PLMA) and Circana for the first quarter, private label penetration increased by almost a point compared to last year and dollar sales grew almost twice as fast as nationally branded products. Even with lower inflationary pressures, consumers are still locked into deriving as much value out of purchases as possible, which benefits offerings like private label and other promotional activities. It can be hard to decipher what all of this means for consumer sentiment and how consumers will look at retail purchases for the remainder of this year. While improving inflation levels can ease the pressure on consumers in the long run, consumers are likely to proceed with caution and limit unnecessary spending. Many shoppers' financial positions have shifted dramatically during the past year, and until the perception around price increases improves, it’s unlikely to move the needle on retail unit demand. Retailers and brands must continue to lean into their value proposition for consumers in the coming months to ensure that sentiment and conversion prosper. What’s next: Retailers must continue to focus on providing value for consumers during discretionary and non-discretionary retail trips and lean into value-based tactics such as private label and price-point promotions.

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