North America Retail Sector Leader & Senior Client Partner
The Price Is Becoming Right
Inflation is coming down. Prices aren’t—yet.
Despite a downward trend in inflation over the last few months—it has fallen to about 6%, its lowest level since September 2021—few leaders are jumping at the chance to lower the prices of goods. It’s a wait-and-see approach that has benefits—and risks. “Any changes in pricing will be small and gradual, given the still-challenging economic environment,” says John Long, retail sector leader in North America for Korn Ferry, pointing to uncertainty around additional interest-rate hikes as one example.
The good news is that prices aren’t likely to increase further, says Craig Rowley, a senior client partner in the Retail practice at Korn Ferry: “Most clients feel they’ve already raised prices as much as they can.” The flip side of that, however, is that retail leaders feel they can’t lower prices for consumers until they lower their own costs, says Rowley, pointing to the still-elevated costs for supplies and labor. Moreover, he says, the mass layoffs taking place across industries haven’t yet shown up in the consumer-spending data. Because it means there’s less discretionary spending, he says, “layoff news makes retailers nervous. Right now they aren’t planning to raise prices, but they aren’t lowering them either.”
For some industries, like travel and hospitality, demand is still so strong that there’s no reason to bring prices down in parallel with inflation. “If people have a dollar in their pocket, they are spending it on experiences instead of goods,” says Radhika Papandreou, sector leader for the Travel, Hospitality, and Leisure practice at Korn Ferry. According to data from the US Travel Association, travel spending totaled $93 billion in February, 5% above pre-pandemic levels. Papandreou says spring break was a “home run for the industry,” and the thinking is that “the summer and rest of the year will be as strong.”
While the downward trend in inflation isn’t likely to reduce prices for consumers, it could stymie wage growth for talent. Salaries in the retail and travel and hospitality industries have risen since the pandemic, for instance, as the demand for talent has increased. That’s as true for frontline workers as it is for senior and executive management. A recent Korn Ferry poll found that a majority of retailers now start pay for associates at $12 per hour; of that group, 30% start pay at $15 per hour. When inflation was at its peak last summer, many companies offered employees a onetime bonus, food stipends, commuting subsidies, or other compensation to bridge the gap. As recently as last October, more than one-quarter of global organizations were still providing additional inflation-related compensation to employees.
Tom McMullen, a leader in Korn Ferry’s North America Total Rewards practice, notes that declining inflation could help take some wage pressure off companies—at least psychologically. “The reduction in the inflation rate should lessen the anxiety that employees have been feeling about wages not keeping pace with inflation,” McMullen says.
For more information, contact Korn Ferry’s Retail practice.