Between the lines in the intriguing New York Times article below, I see two critical points about why the recent wave of inflation occurred and what will happen in 2024 and beyond. Recent inflation reflects a long overdue price correction, not a collision of macroeconomic forces. Prices were trapped in the opposite of a bubble, if you will, because companies have historically overestimated price sensitivity, expressed numerically as price elasticity. That made business leaders reluctant to raise prices. The perceived risks of volume loss and customer backlash were too high, so they kept price levels artificially low. This, in my view, explains why economists were surprised by the inflation burst across markets in the past two years. That burst was caused by both the supply shocks of COVID and the Ukraine war and by some catch-up with the price increases that would have been implemented earlier if companies had truly understood how low elasticities were. Two factors have helped leaders overcome their reluctance. First, they are paying closer attention to pricing and marketing as profit drivers after years of successful cost-cutting and efficiency programs. Second, they have better data, analytics, and experimentation to guide their decisions. The Covid pandemic and supply chain disruptions made the need to act more acute. What leaders discovered is that demand, customer needs, willingness to pay, capacity, and competition are fluid and dynamic, not given. The patterns in that dynamism revealed opportunities to correct artificially low prices, and they capitalized on them. 𝐒𝐨 𝐰𝐡𝐚𝐭 𝐡𝐚𝐩𝐩𝐞𝐧𝐬 𝐧𝐞𝐱𝐭? In some sectors, the recent price increases have created a new equilibrium, but it won’t last. Over the next 12-18 months, the direction of prices – up, down, or steady – will reflect how creatively business leaders think about their pricing models and the dynamism in their markets, as they balance their own objectives for revenue, volume, and margin against increased pressures from customers and competitors to adjust their prices. Where do you think prices are headed next, and why? Please share your thoughts in the comments.
Corporate America Is Testing the Limits of Its Pricing Power