Customers Are Sick of Stomaching Higher Prices, Putting Businesses in a Bind

For nearly three years, consumers have been struggling under the weight of inflation, and now shoppers have had enough sticker shock. 

Across the country, consumers in nearly every Federal Reserve district are pushing back against further price increases, the central bank said in its Beige Book survey of regional business contacts. That’s putting companies in a bind. Retailers said they are having to resort to discounts to entice price-conscious customers, and with input costs still elevated, profit margins are getting squeezed. 

“Overall outlooks grew somewhat more pessimistic amid reports of rising uncertainty and greater downside risks,” said the report, which regularly assesses economic conditions and was released on Wednesday. 

Business owners have consistently cited inflation as their most pressing problem, but now stubbornly high prices may prove even more troublesome if entrepreneurs have little to no ability to pass along their inflated expenses to consumers.

In the Cleveland district, “one business services contact said that passing along cost increases had become more difficult as customers were more closely managing their costs,” the Beige Book noted. In the Philadelphia district, businesses “reported that consumers continued to spend less on each trip as they continue to adjust to higher prices” with local customers being especially price sensitive. 

Businesses throughout the Minneapolis district told the central bank that price-skittish consumers were enough of a problem to dampen their outlook for the summer. A winery and restaurant in Minnesota reported patrons were spending less on average, saying, “guests are being very careful with their money. We see less of our regulars and [more] moderate spending.” One restaurant and hotel owner in Montana told the Federal Reserve it “was trying to avoid passing further cost increases to customers” because “at some point, they will say, ‘I am not paying $20 for a hamburger.'”

With consumers becoming more cost conscious, businesses are having to become more nimble about their price-setting practices. In the Kansas City district, “many contacts reported being willing to change selling prices more frequently compared to last year to protect margins when possible,” the Beige Book said.

The Beige Book is not the only report that has raised this concern. Last month, the National Association for Business Economics came to similar conclusions in its Business Conditions Survey, which found fewer companies were passing cost increases onto their customers. To stave off a customer backlash, businesses are swallowing these expenses themselves–leading fewer to expect their profit margins to increase over the next three months.