Companies Are Struggling With Inflation-Driven Consumers

Year-to-year inflation may look low, but prices continue to compound upwards. For example, “Food at home” pricing, accounting for 8% of the total CPI basket, was up 1.8% in 2024. That seemingly low inflation rate nevertheless pushed up the Covid period price inflation to 27.6%, and that is what consumers are contending with.

So, why is that a problem for companies? Because consumers’ actions to reduce the inflationary effects can adversely affect business revenues and profits. Grocery shopping is a good example. Here are examples of what consumers can do:

• Switch to lower-priced brands (e.g., store brands)
• Substitute alternate products (e.g., chicken for beef)
• Reduce consumption (e.g., one scoop of ice cream)
• Forgo disposable products (e.g., paper towels)

These actions not only affect the grocery stores, but also affect the companies that produce packaged food. The effect is measured by “volume/mix” changes caused by consumers’ altered decisions.

A good example is Kraft Heinz

In last year’s 2023 annual reporting, Kraft’s management anticipated 2024 growth from rises in both sales and prices.

“As announced in its fourth quarter and full year 2023 earnings, the Company reiterates its expectation to deliver [in 2024]:

“Organic Net Sales growth of 0% to 2% versus the prior year. The Company expects a positive contribution from price throughout the year, with volumes inflecting positive in the second half of the year.”

However, consumers tripped up the company’s strategies and expectations. From the 2024 Annual Report:

“Organic Net Sales decreased 2.1% to $25.9 billion in 2024 compared to $26.5 billion in 2023, primarily due to the unfavorable volume/mix (- 3.5%), which more than offset higher pricing (+1.4%).”

Note the higher pricing was well below the 2024 CPI inflation rate of almost 3%.

Wall Street’s outlook deteriorates

So, how did Wall Street view Kraft’s 2024 results and plans? Not well. Below is the stock’s performance for the Covid-period. Note that the company (and others like it) was able to produce inflation-beating results early, but then the consumer actions began to hit, causing a reversal of the previous gains.

With the consumer shifts continuing to hit results in 2025, the stock has now fallen below the cumulative inflation, making the Covid-period “real” (inflation-adjusted) stock performance negative.

The ill effects are not limited to Kraft

While the Federal Reserve focuses on the latest 12-month change in prices, it is the cumulative inflation damage that consumers focus on. After all, a “good” 12-month inflation change of “only” 3% nevertheless compounds high prices even higher. The Covid-period rise is now about 23%.

That level of inflation continues to cause damage, particularly in this period of high uncertainty (see “Uncertainties Are Churning U.S. Stock Market Outlooks” for explanation of why uncertainty can be more troublesome than risk). Here are the S&P 500’s nine companies in the sector/industry combination of the normally safe consumer defensive/ packaged foods. They all got an inflation boost early but are now struggling with both higher costs and changing consumer buying actions. The weak and negative “real” (inflation-adjusted) total returns for the Covid period show Wall Street’s bearish views of the situation and the outlook.

The bottom line: Today’s inflation trend could worsen

In the early 1970s when inflation was a similar concern, I read an interview with a wealthy individual. He made a surprising statement, saying he would happily give up half his wealth if the other half was guaranteed to retain its value. Why was he willing to make such a large payout? Because inflation has a potentially destructive power that can become self-sustaining, even as economic, business, and financial conditions deteriorate. It is what happened in the late 1970s and early 1980s.