The inflation battle might be over, but ‘cheapflation’ rages on
The next frontier in America’s war against inflation isn’t housing or insurance—it’s cheap goods.
According to a National Bureau of Economic Research (NBER) working paper, the prices of cheaper grocery items are rising faster than overall inflation. Authors Alberto Cavallo and Oleksiy Kryvtsov call this phenomenon “cheapflation.”
Over the past four years, the prices of cheaper grocery brands have grown between 1.3 times and 1.9 times faster than their more expensive alternatives.
Between January 2020 and May 2024, prices for the cheapest items grew by a whopping 30%. By comparison, the most expensive brands saw a 22% bump over the same period.
According to the authors, “cheapflation was present only during the inflation surge, indicating it is not a pandemic effect but rather a high inflation phenomenon.”
Perhaps the most damaging aspect of cheapflation is that it “imposes a dual burden from inflation,” the authors said.
Households who substitute their favorite products for cheaper alternatives end up consuming less in the long run. Ironically, some of the money they save from substitution is “later offset by a further rise in prices of cheaper brands.”
Even when headline inflation is approaching pre-pandemic levels, “the relative prices of cheaper options remained permanently higher,” the researchers said.
The end result is an inflationary spiral that disproportionately hurts lower-income families.
The inflation strain continues
Americans from all walks of life continue to name inflation as their biggest financial burden, but low-income households are especially stressed by rising costs.
The U.S. Census Bureau estimates that 11.5% of the total population—nearly 38 million—lives below the poverty line.
Perhaps more worrisome, another 40 million families fall into the ALICE category, which refers to households that are Asset-Limited, Income-Constrained, and Employed.
ALICE includes “those working low-wage jobs, with little or no savings and one emergency from poverty,” said Stephanie Hoopes, a director at United for ALICE.
Americans in the ALICE category typically live paycheck to paycheck and spend less on discretionary goods—items they want but don’t necessarily need.
ALICE is “an acute situation for more people than a few years ago,” said Brett House, an economics professor at the Columbia Business School.
Consumer goods conglomerates are sounding the alarm. In a recent earnings call, PepsiCo CEO Ramon Laguarta said, “The lower-income consumer in the U.S. is stretched.”
Meanwhile, Tyson Foods’ chief growth officer, Melanie Boulden, stated: “The consumer is under pressure, especially the lower-income households.”
It’s no wonder that consumer confidence is sinking across the board.
According to the University of Michigan, consumer sentiment recently fell to its lowest level in eight months as Americans “remain vociferously frustrated at the persistence of high prices.”