Even though recent inflation readings have been muted, we should be careful of being lulled into a false sense of security. While it’s true that prices haven’t risen much yet, there are reasons to be concerned as we look forward.
By front-loading shipments into the earlier part of this year, retailers have been able to continue to sell goods that have a lower cost basis. Imports for the first four months of the year ran 10% higher than in the same period last year. That won’t last forever, though.
As inventory becomes depleted, shelves are being restocked with goods that have been more expensive to source. And there will be fewer of those goods to go around. Imports in the next few months are expected to be well below last years’ levels.
Anecdotally, we hear that retailers are keeping prices lower for consumers by adopting lower margins on some products. While this creates some relief for consumers, it is worse for our economy in the long run.
According to data from the Penn Wharton Budget Model, economic impacts worsen when businesses bear the burden of cost rises. Negative GDP impacts increase as businesses “eat” the costs of the tariffs. This is because cuts are made elsewhere — in jobs and investments. Falling business investment has been the key driver of GDP reductions in previous recessions.
Retailer gross margins and profit margins tend to be lower than most other major industries. This difference is clearly visible when we compare some of the largest U.S. retailers against their peers in other sectors.
Some segments of retail have profit margins of less than 2%. Conversely, major technology and financial services firms have profit margins that can range between 25%-40%. In terms of profit per employee, retailer profits are dwarfed by their competitors in other sectors. Any expectation that retailers can absorb large price shifts is misguided at best.
While inflation remains muted for now, many of the factors keeping prices down are likely transient in nature. As those impacts begin to fade, it’s hard to see a scenario where prices don’t start ticking upwards.
