Now Prices Are Going … Down?

Last week, Walgreens announced price cuts on 1,300 items — including vitamins, tampons, skin-care products, and groceries — because the company “understands our customers are under financial strain and struggle to purchase everyday essentials.” A few weeks before that, Target reduced prices on thousands of goods like fruit, dairy, coffee, peanut butter, pet food, and paper towels, stating that it would “help customers save big” as they are “feeling pressured to make the most of their budget.”

But shoppers who have been pissed off about their grocery bills for years now are calling bullshit. Lowering prices to “help” people? Please. No one’s going to be mad at cheaper face wash, but the sudden rollback seems contrived. Until now, companies have blamed inflation for growing costs. Was that a lie? Some customers accused the retailers of price gouging and greedflation. Others said the price cuts were too little, too late. (Not to mention a lot of the discounts were $1 to $2 — hardly doorbuster savings.)

What exactly is going on? Sure, inflation has slowed, but it’s still higher than normal. The economy continues to look healthy by almost all measures despite the weird vibes. What’s causing this abrupt shift? We asked some experts to explain what’s happening and what we can expect in the future.

Why are stores lowering prices now instead of months or even years ago when it was clear consumers were struggling to pay for basic necessities? 

“It’s understandable that customers might say, ‘Oh, you can lower the price now, so you could have lowered the price all along and you’ve been gouging us,’” says C. John Zhang, a professor of marketing at the Wharton School who specializes in pricing strategies. “But it’s more complicated than that.” Inflation and pricing aren’t exact formulas. They’re based on supply and demand, which retailers are always trying to predict with imperfect information — and sometimes get wrong.

Initially, prices went up for very concrete reasons. Back in 2020, the pandemic broke the supply chain and inflation ballooned. Sure, some retailers probably gouged prices to capitalize on the general havoc, but the higher cost of goods — and of transporting them — was real, Zhang says. Retailers had to transfer some of those costs to consumers by raising prices to stay afloat. (Corporations do have to turn a profit to stay in business and appease their shareholders; they can’t eat rising costs just to be nice.)

Meanwhile, many Americans also managed to save money during the first year or so of COVID because they were stuck at home and, in some cases, getting stimulus checks. So even though nobody was happy about it, most people could still afford to buy stuff despite the sticker shock.

But those factors no longer apply, says Zhang. “The supply-chain issues are smoothed out, so retailers can more easily afford to give customers a break,” he explains. What’s more, customers have burned through their pandemic savings and can’t keep buying things that cost so much. “People are changing their shopping habits and shopping less,” says Zhang. “Pricing is a dance. When you raise prices too much, customers pull back. So you give them a sale or a promotion to get them to return.” At the end of the day, if you overcharge, you’ll be undercut by your competition. He adds, “Your prices can only be as high as people are willing to pay.”

Retailers have blamed inflation for higher prices. Inflation is cooling now, but that usually doesn’t mean prices go down. What’s going on? Was inflation just a cop-out?

Inflation was and is real. But it’s also hard to predict, says Mark Cohen, the director of retail studies at Columbia Business School. “The onset of inflation was sudden, but the diminishment of inflation is gradual and takes years,” he explains. “Businesses are always trying to get ahead of it, with good reason — they’re scared to death of what will happen if it continues to spiral.”

Here’s the thing: It’s much easier to discount prices if you overestimate inflation than it is to make up for lost profits after the fact. So corporations would prefer to overshoot the mark, says Cohen. “Most companies don’t overcharge customers deliberately. They just didn’t know whether inflation would continue to rise or begin to abate.” Now that the latter is happening, they’re in a position to ease up.

Some consumers believe that recent price cuts show that retailers were previously price-gouging — raising prices because they could (and everyone else was), not actually because of inflation. To what degree is this true? 

“Some enterprises are certainly guilty of gouging, cheating, cheating, lying, behaving illegally or in a less than ethical way,” says Cohen. “But in most cases, businesses aren’t smart enough to know where events of the day are headed. They’re taking action to protect their profitability. Now, they’re seeing that they don’t have to be as aggressively defensive anymore.”

In short, inflation wasn’t necessarily a fake excuse for exploitative corporate behavior; the bigger problem is that retailers overreacted in their response to it. Now they’re trying to course-correct, especially since their prices are hurting their bottom line in a different way: by driving customers off.

These corporate statements about cutting prices to “help” customers are a bit rich, though. “For these retailers to say, ‘We have your best interests at heart. Look what we just did for you’ — that’s ridiculous,” says Cohen. “It’s insulting to their customers’ intelligence.” Instead, he believes they should be honest and accurate: “They could say, ‘Look, we were confronted with the same explosive inflation that you’ve all faced. Inflation has not disappeared but is abating. We have learned that we are in better shape financially than we thought we would be. And as a result, we’re taking action to reverse the high prices you’ve seen on our shelves.” See, is that so hard?

Can we expect to see more price cuts in the future?

“Prices will never come down to where they were before the pandemic,” says Zhang. “The reason is that high prices are already baked into the cost of doing business. Salaries are higher. Materials cost more. So prices may keep coming down a little bit as inflation continues to ease but not all the way to what they were five years ago.”

Also, certain items are more likely to become cheaper than others. “If you’re a retailer, your incentive is basically to charge as much as you can for the goods you’re selling without losing customers, looking bad, or getting pushback,” says Zhang. Most companies address these conflicting objectives by keeping prices higher for products that customers aren’t paying as much attention to and keeping prices low (or offering discounts) where people will take note.

For instance, Walgreens, Amazon Fresh, and Target are all lowering prices on things people buy regularly. “If the vitamins you buy every month become cheaper, then people will notice; they’re more price sensitive,” Zhang says. “Higher prices on things people don’t buy as often, like perfume, don’t bother people so much because they’re less likely to remember or care what they paid for it last time.”

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