Big Price Cuts Unlikely in Corporate America – NBC Chicago
TL/DR –
The Federal Reserve hinted at potentially cutting interest rates three times in 2024, benefiting not just the stock market but also mortgages, auto loans, and all forms of consumer debt. However, despite the cut in interest rates, corporations are unlikely to reduce their prices quickly, as they are experiencing significant pricing power. Also, as wage growth is currently outpacing inflation, Americans are seeing real income gains, further encouraging corporations not to decrease their margins.
Federal Reserve Signals Possible Interest Rate Cuts in 2024
The Federal Reserve indicated this week potential interest rate cuts in 2024, which could benefit the stock market, mortgages, auto loans, and consumer debt. However, corporations may not quickly lower prices, despite experiencing pricing power.
As wage growth continues to rise above inflation, Americans are witnessing real income gains, further boosting consumer spending and dissuading companies from relinquishing margin gains.
President Joe Biden has been actively criticizing big corporations for high prices, declaring “Stop the price gouging.”
Despite the President’s efforts to reduce consumer financial stress by forgiving student debt and lowering key drug prices, corporations have maximized their pricing power during this inflationary period.
As the Federal Reserve becomes comfortable with inflation decline, corporations are less likely to talk about price cuts.
Richmond Fed President Tom Barkin, a former corporate sector CFO, noted that companies will persist in raising prices “until they have to.”
No Rush to Cut Prices
Despite the potential for real wage growth, corporations are not eager to lower their prices. KMPG chief economist Diane Swonk emphasized, “Inflation is falling faster than wages.”
However, easing rates may stimulate the economy and encourage a more rapid economic growth. Yet, companies may hesitate to be the first to cut prices after recently recovering their margins.
Deflation vs. Slowing Price Increases
Recent price declines do not necessarily indicate a broader trend of deflation. While companies may begin to evaluate their pricing strategies, more signs of market stability are needed before implementing significant changes.
In the food distribution sector, key commodities continue to experience deflation, though consumers will not immediately notice these changes when dining out.
Predicting the End of Price Increases
As the consumer market continues to thrive, it becomes harder for companies to gauge the size of their market opportunity. For instance, retail sales recently surpassed expectations.
However, predicting the end of these price increases is difficult. As one CFO on a recent CNBC Council call noted, “We’re all a bunch of cars on a highway. Who wants to hit the brakes before the person in front of them hits the brakes?”
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