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Inflation Investigation: How High and Who’s at Risk?

Consumer prices rose again in March, adding to months of sticker shock and amounting to inflation’s biggest leap in 40 years, according to government data released Tuesday.

Over the last 12 months, the CPI, or Consumer Price Index, jumped an unadjusted 8.5 percent for the largest 12-month inflation increase since December 1981. What’s more, U.S. retail apparel prices ticked up a seasonally adjusted 0.6 percent in March from the previous month, with men’s and girls’ clothing costs driving the surge, the U.S. Bureau of Labor Statistics (BLS) reported.

Men’s wear prices were up 1.1 percent last month, with a rise of 3.6 percent rise in pants and shorts; 0.7 percent in suits, sports coats and outerwear, and 0.3 percent in the underwear, nightwear, swimwear and accessories group outweighing a 0.7 percent decline in shirts and sweaters.

Women’s apparel prices were flat in March, as an increase of 0.5 percent in suits and separates balanced out decreases of 2.4 percent in the underwear, nightwear, swimwear and accessories group; 1.3 percent in outerwear and 1 percent in dresses. (Seasonal adjustments and volume levels account for the anomalous mathematical discrepancies.)

Prices for girls’ apparel rose 2.2 percent in the month, while boys’ clothing cost 0.5 percent less and infants’ and toddler’s apparel prices fell 1.5 percent.

Retail footwear prices dipped 0.1 percent in March, with a 0.4 percent rise in men’s, a 1.5 percent decline in women’s and flat prices in boys’ and girls’ shoes.

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In home goods, retail prices of household furnishings and supplies increased a seasonally adjusted 1 percent for the month, the eighth consecutive increase, and were up and unadjusted 10.8 percent from March 2021–the largest 12-month increase since July 1975, BLS said.

Within the category, the cost of furniture and bedding rose 0.6 percent last month and jumped 15.8 percent year over year.

Compared to a year earlier, apparel prices were up 6.8 percent, caused by the inflationary pattern in the country and higher costs in the sector’s supply chain, from raw materials to energy and logistics.

For example, U.S. spot cotton prices averaged $1.33 per pound for the week ended April 7, down $1.35 from the prior week, but up from 74.97 cents a pound a year earlier. In ocean freight, Drewry’s World Container Index (WCI) fell 1.4 percent to $8,041.50 per FEU in the same period, but was 64 percent higher than a year earlier.

The CPI report showed the energy index–important for the cost of operations and shipping–rose 32 percent over the past 12 months with all major energy component indexes increasing.

The overall CPI increased 1.2 percent in March on a seasonally adjusted basis after rising 0.8 percent in February, according to BLS. Over the last 12 months, CPI rose an unadjusted 8.5 percent for the largest 12-month increase since December 1981.

Increases in the indexes for gasoline, shelter and food were the largest contributors to increase. The gasoline index rose 18.3 percent in March and accounted for over half of overall monthly rise.

The core index, less food and energy, rose 0.3 percent in March. The shelter index was by far the biggest factor in the increase, with a broad set of other indexes also contributing, including those for airline fares, household furnishings and operations, medical care and motor vehicle insurance, BLS reported.

The core index was up 6.5 percent for the 12-month period, its biggest such increase since August 1982. The energy index rose 32 percent over the last year.

The energy index, a key component for business operations, rose 11 percent in March following a 3.5 percent increase in February. The gasoline index rose sharply in March, increasing 18.3 percent after rising 6.6 percent in February. The index for electricity increased 2.2 percent in March, while the index for natural gas rose 0.6 percent over the month.

The index for gasoline jumped 48 percent over the last year and the index for natural gas rose 21.6 percent. The index for electricity increased 11.1 percent for the 12 months ending March. 

Adobe: online prices spike 3.6 percent annually

Adobe data further confirms that consumer spending power isn’t what it used to be. Last month, online prices increased 3.6 percent year over year and 0.3 percent month-over-month, with the year-over-year totals matching February’s growth.

This marks the 22nd consecutive month of year-over-year inflation online, Adobe said Tuesday in its Digital Price Index (DPI), which analyzes 1 trillion visits to retail sites and over 100 million SKUs across 18 product categories.

Apparel prices soared 16.3 percent year over year in March and 0.3 percent on a month-over-month basis, outpacing every other category.

They also outpaced the broader CPI’s 8.5 percent increase in March, reversing the longstanding pattern for the category, where seasonal discounts created predictable peaks and valleys in online prices.

In February, apparel prices rose 11 percent in the DPI, compared to 3.1 percent in the CPI.

Despite higher prices and supply chain challenges that drove 3.1 billion out-of-stock messages in March, e-commerce demand remained strong. Consumers spent $83.1 billion (up 7 percent year over year), a significant increase from $67 billion in February.

Prices surged across grocery as well, with totals rising 9 percent year over year and 1.4 percent over February totals, a new record. March now marks the 26th consecutive month where online prices have risen for groceries, making it the only category to align with the CPI on a long-term basis.

Tools and home improvement products are up 8.5 percent in price from last year—the highest increase for the category on an annual basis—and up 1.1 percent over the prior month.

Prices for everyday staples including pet products increased 7 percent year over year (up 1.5 percent month over month) and personal care items increased 1.4 percent on an annual basis, while ticking up 0.1 percent on a month-over-month basis.

In March, 14 of the 18 categories tracked by the DPI saw year-over-year price increases. Price drops were observed in electronics, jewelry, toys and computers.

On a month-over-month basis, 12 of the 18 categories saw March price increases, with price drops documented in categories including electronics, books, toys, flowers/related gifts, computers and sporting goods.

“Consumers are feeling a greater hit to their pocketbooks, with consistently high levels of online inflation in categories such as groceries and pet products,” said Patrick Brown, vice president of growth marketing and insights at Adobe. “But while e-commerce prices have risen more than years past, durable demand shows that consumers are embracing more personalized experiences in the digital economy as well as the conveniences of online shopping, particularly for growing categories like groceries.”

Gas, groceries top price hikes, but apparel and footwear in the hot seat

Consumers agree that higher prices are impacting their everyday lives. While as many as 66 percent felt soaring gas prices were a pain in their day to day, 57 percent agreed that what they’re paying for groceries affects their lives as well, according to a First Insight survey.

But apparel, footwear and accessories costs are also affecting consumers’ daily lives, with 19 percent of consumers saying so in the product decision platform’s survey. So far, the industry has benefited from the price increases, and dangled fewer promotions since demand picked up over the 2021 holiday season. But if prices keeping climbing, there is a risk that consumers will quickly face a limit on how much they want—or are able—to spend.

“Soaring gas and food prices are just the tip of the iceberg for consumers today,” said Greg Petro, CEO of First Insight, which sampled 1,000 U.S. adults in April 2022. “Record high prices on essential items will negatively impact both consumers’ confidence and their spending power. Some categories, such as apparel, footwear, accessories, travel and entertainment may struggle as consumers cut back on discretionary spending.

“It will be critically important for companies to remain close to their customer base to predict how they are going to respond to all the changes out there,” Petro added.

Who’ll survive the inflation storm?

The current environment is likely to separate the winners from the losers, according to Moody’s Investors Service’s analysis.

The credit ratings firms said mid-price department stores and apparel retailers are most at risk if inflation stays high, citing Macy Inc. and Kohl’s, both of which have stable ratings at the moment. On the other hand, it gave Abercrombie & Fitch a positive rating.

Labor, material and freight cost increases aren’t retail’s only headache as oil, food and metal prices have climbed in the wake of Russia’s war in Ukraine. This means retailers are likely to have a tough time meeting profit expectations. Wells Fargo retail and specialty softlines analyst Ike Boruchow previously warned investors to take fashion’s “increasingly unrealistic” earnings guidance with a grain of salt. He expects that fashion and retail companies are “more likely than not” to miss the rosy 2022 projections many issued heading into the current calendar year.

And the longer the war drags on, the worse the effects on the global economy, Moody’s said.

For the moment, low unemployment, wage growth and healthy savings continue to buoy consumer spending. But most lower- and middle-income consumers tend to have smaller rainy day funds, and housing and stock market gains typically mean less for their bottom lines. Experts expect increasingly price-sensitive shoppers to trade down to low-cost retailers and buy more low-frills products. That means mass market retailers, dollar stores and off-price outfits such as TJ Maxx could come out on top.

In fact, Dollar General CEO Todd Vasos expects the retailer to pick up new shoppers as “inflation continues to take hold across the U.S.”

At the other end of the spending spectrum, Tapestry and could continue to benefit from the ongoing recovery in formal and office-appropriate apparel and accessories spending and best weather ongoing turbulence, Moody’s said.

Well-capitalized retailers like Walmart can flex their buying power, adapt assortments to optimize gross profit and absorb cost increases as needed.

“Retailers with strong brands that offer value for the money also have greater ability to raise prices,” Moody’s said. “In contrast, smaller companies with higher debt levels have less clout to negotiate with vendors and secure product in a disrupted supply chain environment.”