One sign that people’s habits are beginning to change as high inflation rates persist (yes, the latest PCE data were superficially more encouraging, but please see more on that below) appeared on Thursday with results from both Dollar General and Dollar Tree beating expectations.
The two retailers said they see opportunity to grow as Americans weigh value more heavily in their purchasing decisions, whether buying groceries or seasonal decor.
“We’re already starting to see our core customers start to shop more intentionally,” Dollar General CEO Todd Vasos said on a call with analysts. “And we’re starting to see that next tier of customers start to shop with us a little bit more as well.”
Dollar Tree Executive Chair Rick Dreiling listed the many challenges that consumers are facing, from the highest levels of inflation since the early 1980s to record high gas prices and uncertainty from current events such as the Ukraine war and the pandemic. He added that many consumers “are living paycheck to paycheck.”
Contrast the story from Walmart and Target, which I discussed here and here.
Four other points from the CNBC report that caught my eye:
Dollar General has a few other cost-saving and profit-driving measures underway, too. It added self-checkout to more than 8,000 stores as of the end of the first quarter. It plans to turn about 200 stores into self-checkout only this year.
Tell me again how the labor shortage is going to endure . . .
The transportation problems that have dogged the business world for at least a year have clearly left a scar:
[Dollar General] is more than doubling its private fleet of trucks from 2021, so they account for about 40% of its outbound transportation fleet by the end of the year.
Meanwhile Dollar Tree has clearly not been hurt by its decision to break through the buck (I wrote about that last year):
At Dollar Tree, a price hike has been a big boost for profitability. The retailer announced last year that it would raise the price of dollar items by a quarter. It is rolling out $3 and $5 items to more stores, too.
Finally, it’s worth paying attention to this:
Shoppers are still coming to stores, but are buying different items. Food is a bigger part of baskets and drove sales for Dollar General and Dollar Tree in the fiscal first quarter.
A year ago, consumers had extra dollars from stimulus checks and child tax credits. That meant some sprang for impulse items or discretionary purchases. Those dollars have disappeared and other budget items, such as groceries and gas, have become pricier.
Another sign that the ‘stag’ half of the nightmare stagflationary scenario may be coming closer to reality? Maybe. So far, despite the fact that real incomes have not been keeping pace with inflation, most Americans have been able to keep up their spending with the help of savings accumulated during the pandemic period. The evidence from the two ‘Dollar’ chains of pressure on those at lower income levels may be an early sign that that is changing.
And then there’s this, from the New York Times:
Record levels of government aid during the pandemic, combined with reduced spending on many leisure activities, allowed Americans to build up a substantial reserve of extra savings — $2.5 trillion or more by some estimates. That cushion could allow consumers to keep spending even as prices rise. A snapshot of Americans’ financial health conducted last fall and released by the Federal Reserve this week found that 78 percent of respondents felt they were “doing at least OK” — the highest rate in the survey’s nine-year history.
But relying on savings is unsustainable in the long run. Economists say many lower-income households have probably already exhausted their savings, or will in the months ahead, especially as high gas and food prices continue to take a toll. Balances of credit cards and similar types of debt rose at a 35.3 percent annual rate in March, the biggest one-month increase since 1998, according to data from the Federal Reserve.
On the inflation side, as mentioned above, there was some superficially encouraging data.
CNN:
The price index measuring Personal Consumption Expenditures rose by 6.3% year over year in April, the Commerce Department reported Friday. It was a decrease from March, when prices rose by 6.6%, and the first slowing of price hikes since November 2020.
President Joe Biden called the data a “sign of progress,” but noted that “inflation is still too high and Putin’s price hike continues to impact food and energy prices.
Ah yes, Putin’s price hike™.
Of course, the war in Ukraine (and sanctions) are contributing to higher prices, but it’s worth remembering that U.S. food and energy prices were moving up well before the Russian invasion.
Back to CNN:
Stripping out more volatile items like food and energy, core PCE inflation, which is the Federal Reserve’s preferred measure of consumer prices, rose by 4.9% over the same period, down from 5.2% recorded in March.
Sadly, no lasting relief on either the energy or food front can be expected for a while. There’s also the cost of ‘shelter’ to consider. That tends to lag behind increases in home prices, and, after the recent surge, home prices continue to be at record levels, despite some early indications that the froth may be coming off the market.
One (not particularly scientific) sign that an inflationary mindset is establishing itself has been the surge of interest in the Treasury’s Series I savings bonds.
The Washington Post:
People searching for a respite from inflation have flooded the Treasury Department phone lines and website to try to buy Series I savings bonds, causing much longer waits than usual…
On May 2, the Treasury Department announced that the inflation-protected I bonds will earn 9.62 percent interest at least until the end of October. A day later, TreasuryDirect, the website that people have to use to purchase the bonds, crashed.
We don’t make investment recommendations here at Capital Matters, but the Post also featured a discussion on these bonds here, and the Treasury explains them here.
Another sign of inflationary times is the announcement of price changes by sticker, a memory for me of growing up in the 1970s, and something I have started seeing here in New York City lately. The time before — not an encouraging precedent — was in Argentina in 2019.
Then there was this story from Bloomberg:
To fathom just how rampant inflation now is in some corners of the US, duck into the Miami River Cafe, a Mexican place in the city’s East Little Havana district.
It’s not the prices on the menu so much that’ll shock you. They’re actually still very cheap (and the tacos really good). It’s the fact that the prices were scrawled in pen on stickers slapped on the menu. Those stickers are a tell-tale sign that prices are going up at such a rapid-fire clip that the staff is struggling to print new menus fast enough. Rewriting prices on old menus is easier and cheaper, too…