U.S. inflation remains almost non-existent based on the Consumer Price Index (CPI), and there are many deflationary forces at play such as high unemployment, excess manufacturing capacity, and weak domestic demand. Core inflation even hit 0.0% in August, which is just shade away from literal deflation.
Yet internationally, commodity prices have been soaring since despite sluggish growth in developed nations, demand growth for commodities primarily comes from developing nations such as China. Global meat prices just hit a 20-year high for example.
So far this global commodity inflation hasn’t appeared to spill over into the U.S. too much, as many companies have absorbed higher raw material costs without passing on higher prices to consumers. But they can’t do this forever, and what makes things tricky is that when they do begin increasing prices, they will do it in indirect ways, so that consumers notice the higher prices as little as possible.
Starbucks (SBUX) is a great example of this. Just two days ago the company said that it was forced to increase its prices, but it will only do so for select products:
“Over the last six months a highly speculative green coffee market and dramatically increased commodity costs have completely altered the economic and financial picture of many players in the coffee industry,” said Howard Schultz, Starbucks chairman, president and CEO. “And while many, if not most, coffee roasters and retailers began raising prices months ago, we have thus far chosen to absorb the price increases ourselves and not pass them on to our customers. But the extreme nature of the cost increases has made it untenable for us to continue to do so and we have been forced to take the steps we announced today,” Schultz added.
As part of the plan, Starbucks expects to maintain or lower the price of some of its most popular beverages, including certain espresso beverages; and, in most markets, its popular $1.50 tall brewed coffee; and to raise prices of labour-intensive and larger-sized beverages. The company also said that it would continue to carefully monitor and evaluate green coffee prices and the possibility of raising prices in consumer packaged goods channels in coming months. “As we navigate this challenging cost environment, we will continue to offer value options for our customers every day through our My Starbucks Rewards loyalty program and other promotions,” added Schultz.
So it’s a price hike wrapped in a few price reductions and a $1.50 basic coffee. Thing is, Starbucks knows that they can get you on the sandwich you order with the coffee, so they’ll probably put the price hike in the sandwich while making it seem like their basic coffee hasn’t changed.
Wendy’s provides another interesting example. They recently announced that they would increase prices, but look how they’ve sugar-coated it:
In order to spin what appears to be an upcoming price increase on a few menu items, Wendy’s is graciously offering their small Frosty, small chilli, baked potato, and Double Stack burger for 99 cents “for a limited time” in honour of their 40th anniversary.
Wait, weren’t these items always 99 cents? This reminds me when they advertised how you got two whole strips of bacon on a Jr. Bacon Cheeseburger after years of giving three and when they introduced their “Chicken Temptations” line essentially as a ploy to raise the price on the Spicy Chicken sandwich.
So give it some time, soon Starbucks will be increasing the price of their $1.50 coffee while graciously keeping the sandwich price flat. That’s how they getcha, and it shows how commodity inflation globally can sneak its way into the U.S. despite weak domestic U.S. demand.
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