Forget jewelry, overseas vacations, or designer handbags. In this age of high inflation, Brie Frame of Somerville has a new definition of what she considers “luxury.”
“I have gotten very picky about where I will go out [to eat] because it is going to be a once or twice a month thing now,” she said. “What is a luxury has kind of become a lower bar.”
Frame says she hopes prices will soon “stabilize.” But stable is hardly the best way to describe the economy and prices right now.
After soaring last year, inflation has cooled faster than economists had expected. Still, prices at grocery stores and malls aren’t likely to go down anytime soon.
That’s because the economy and the job market remain hot, despite predictions of a recession. Wages are still rising. Gross domestic product climbed a healthy 2.4 percent last quarter, according to new figures out Thursday. And in a growing economy, consumers will generally continue to spend money, driving up demand and prices.
The result is an unpredictable economy that has confounded policymakers and retailers alike.
“We’re in a very unique situation,” said Sidhant Rastogi, managing partner of global management and strategy consulting firm Zinnov. “We never had a labor shortage and price increases [at the same time like this], which is why most companies seem to be struggling to predict anything.”
And that has upended the strategies of major retailers like Target, Amazon, and Walmart, who had anticipated an economy that would slow considerably this year, possibly into recession. Such an economic downturn would normally dampen sales, leading retailers to cut prices to stimulate demand. Now they wait, unlikely to make any big moves to juice sales until they have a firmer grasp of what’s going on.
“Retailers are on pins and needles right now,” said Carol Spieckerman, founder and president of Spieckerman Retail consulting firm. “It feels like they need to reset.”
These days, pins and needles can feel like a permanent condition. Companies over the past decade have struggled to stay ahead of impactful events and trends that only seem to be accelerating in pace and frequency, from climate change to artificial intelligence, the COVID pandemic to the war in Ukraine. In a recent survey by AlixPartners, 85 percent of CEOs said they are finding it increasingly difficult to know which disruption to focus on.
“No one would say things are calming down,” the report said. “A constant and accelerating bombardment of challenges is their single-biggest worry.”
And that can make it hard to know how to price their products. Retailers came into 2023 with a conservative, defensive mindset, worried soaring prices meant consumers would likely tighten up their budgets. For good reason.
“It seems like literally everything is getting more expensive,” said Olivia Gunthert as she visited a Starbucks in Cambridge Wednesday. “I’ve definitely tried to (save money). Instead of going to work out at places, I’ve been walking more and things like that. Trying to make my own drinks at home and not spend as much money on alcohol and stuff.”
That mindset means retailers have to tread carefully. Higher prices can mean higher profits, but pass too much cost onto consumers and you can rapidly lose sales. These days, though, customers are armed with higher wages and still some pandemic savings, and seem willing to spend on products they feel are worth it.
Sales from electronic and appliance stores increased 1.8 percent from May to June, according to estimates by Coresight Research. Apparel and accessory retailers saw sales grow 1.3 percent versus a small 0.2 percent gain in May.
Even home goods and furnishings stores enjoyed some improvement: sales declined 3.6 percent in June compared to a 5.8 percent drop the previous month.
Wayfair Inc. CEO Niraj Shah recently said he is quite optimistic about where the Boston-based home goods company stands compared to last year.
“During that period of peak inflation and supply chain scarcity, we were not able to have as compelling retail prices as we would like,” he recently told analysts. “We do now … you’ve seen the customer count and the order count grow. That’s a trajectory that’s continuing.”
And, as always, shoppers love a bargain. Off-price retailers have been flourishing, including TJX Companies Inc. in Framingham, which operates T.J. Maxx and Marshalls. Their business model consists of very cheaply buying brand-name clothes, shoes, and accessories from retailers looking to shed inventory, then re-selling them at big discounts. Consumers love the format because they still like the thrill of finding a really good deal, said Spieckerman, the retail consultant, and TJX reported that sales climbed 3 percent in the first quarter.
“Our continued focus on value has served us extremely well through many kinds of economic environments, including periods of inflation and through recessionary times,” CEO Ernie Herrman recently told analysts. “We see our differentiated treasure hunt shopping experience as a tremendous advantage.”
With inflation cooling faster than expected, non-discount retailers are left with a dilemma. Should they start lowering price to compete for customers? The answer is not so simple.
Prices are about supply and demand. To protect profit margins, many retailers, including Target, had already cut inventory for the year because they thought consumers would spend less. Ordering more goods now would take time and great expense.
And retailers love profits, and profits are strong. So the status quo might suit them just fine.
In its survey, Coresight found many people have either delayed purchases or more purposefully searched for discounts and promotions. But judging from the strong sales at steakhouses like Outback and LongHorn, consumers are still willing to pay $40 or $50 for a nice steak dinner.
But retailers need to show investors that they can grow sales too. So there might be opportunities to cut prices in specific categories that allow them to gain market share, especially during the all-important holiday shopping season.
“As we navigate this challenging environment, we will continue to lean into flexibility while remaining vigilant in monitoring changing trends with the consumer and the economy,” Target chief growth officer Christina Hennington told analysts.
But the economy has proved quite unpredictable this year, frustrating not just retailers but also policymakers like the Federal Reserve as they try to manage inflation.
“Even the best economic minds have struggled to deal with the situation,” said Brett House, an economics professor at Columbia University. “We’re not going back to the old normal.”
Thomas Lee can be reached at thomas.lee@globe.com. Aruni Soni can be reached at aruni.soni@globe.com. Follow her @AruniSoni.