Michael A. MacDowell: The market works, but slowly

Coffee drinkers are leaving Starbucks.

Never known for inexpensive coffee, Starbucks’ customers are finally getting the message and are passing on $3.65 cups of coffee and $6.95 pumpkin spiced lattes. As a result, traffic at Starbucks stores has dropped 7% since March 31, representing the steepest quarterly decline in customers since 2010.

McDonald’s has seen the writing on the wall. Faced with declining store sales and customers refusing to pay $6.09 for a Big Mac in Chicago, and other metro areas. McDonald’s will now be “laser-focused on affordability” according to CEO Chris Kempczinski and is considering reintroducing its $5 “value meal.” Most fast food restaurants are getting serious about holding the line, and in some cases reducing prices which are 33% higher than they were in 2019.

Grocery stores have shocked customers with price increases for several years. Not a week goes by without one hearing about the price of ground meat, milk or other staples echoed by those who shop regularly. Stores place much of the blame for increasing prices on food companies such as Kraft Heinz and Mondelez International. They too have been impacted by customer abandonment because of price and “shrikflation” when package size diminishes, but price doesn’t. Kraft Heinz’s quarterly sales dropped by 1.2% and Kellanova, which makes Pringles and Pop Tarts, reported a 5% sales decrease, according to the Wall Street Journal, due to shifting buying habits. Aldi has both stimulated and benefited from consumer’s propensity to “shop around” by offering lower prices on seasonal and other items.

Standard economic theory tells us that as the price of goods and services increases, consumers will react by buying less of those products and/or shifting consumption habits to less expensive competitive products. The result is decreased demand for higher priced products and eventually lower prices overall. The question remains when this will happen and to what degree it will occur.

In many instances it already is. McDonald’s value meals, Aldi’s focus on prices, and Domino’s choice to ride out the storm by keeping prices low thereby attracting new customers add credibility to the fact that markets work. Customers vote with their wallets and their feet.

So, the market does work, but often not fast enough. As a result, pressure is placed on governments to intervene with price controls, but such attempts are fought with problems. One positive role for government in addressing prices is to ensure that competition is maintained among producers. The larger a single firm is in any one market, the more chance there is for companies to control markets by diminishing the ability of customers to find alternatives products. If Kraft and Heinz had not merged and were still competing against one another, would the price of Miracle Whip or Velveeta be what it is today? However, often governments’ actions enhance the probability of inflation. California, hardly a laggard when it comes to government mandates, passed legislation that raised the wages of workers in fast food restaurant chains from $16 to $20 an hour. Partially as a result, the price of a chicken burrito increased 83% at Chipotle.

Federal spending, which economic theory suggests should be minimized when the economy is working well, has instead grown. Politico recently noted that the administration’s laws have appropriated $1.1 trillion in spending on energy and infrastructure projects and continues to push for student loan forgiveness which the University of Pennsylvania estimates will cost the country $475 billion.

At the same time, our proverbially botched up immigration system has not created viable ways for recent immigrants, who for centuries have staffed entry level jobs in America, to enter the workforce.

Yes, the market does work. Higher prices move consumers to shift their purchases to lower price items thereby causing firms to eventually lower prices. But the time that it takes for this process to work can be painstakingly slow, and in the interim pressure is placed on elected officers to “do something.” Unfortunately, it is the government itself which often initiates the inflationary spiral. Will the recent tariff on Chinese electric vehicles increase the price of EVs in the U.S? Most certainly it will. Before we ask the government to help us cope with rising prices, let us consider what they have already done to stem inflation.