Billions of consumers around the world are seeing higher oil prices seep into the cost of living and wages. Filling the gas tank soon starts to cost more when crude prices climb, as does airfare, but higher energy costs also boost prices for all the products on store shelves. Workers seek higher wages to compensate for a loss in their purchasing power.
These are what economists call second-round effects, and they can in turn further raise prices. If this feedback is large and sustained, a wage-price spiral could emerge, with wage growth and inflation rising over an extended period.
The biggest debate in financial markets is whether the US economy is already in recession, and that’s because the data is decidedly mixed. Inflation is raging, but the jobs market is red hot. Perhaps the answer lies with discount retailers.
For most of modern economic history, the value of the U.S. dollar has declined with time and inflation. For a Dollar store, the promise of $1 prices gets a little tougher to keep every year.
This year the $1 price point is especially constraining. During the company’s most recent earnings call, Dollar Tree executives detailed the specific pressure the company is under as its freight costs spiral out of control amid bottlenecks in the global supply chain. While other retailers are raising prices on customers to recoup their own costs, Dollar Tree is more bound to its current prices because of its fundamental promise to customers.
“We believe the Dollar Tree banner imports more containers per $100 million in sales than other large retailers,” CEO Mike Witynski told analysts and investors in August, according to a Seeking Alpha transcript. “And combined with our low $1 price point, we have an outsized impact from freight costs.”
The company projected an additional $185 million to $200 million in estimated freight costs for the year on top of already high costs, all of which create a major drag on profits. By comparison, executives at Dollar General, which doesn’t share the same commitment to the $1 price point, have acknowledged the challenge of rising costs but haven’t painted the same gloomy picture of its impact on the year as Dollar Tree.
AWM has more of the details:
Dollar Tree’s stock prices dropped from $106.32 to a low of $87.64 per share since the announcement but have been on their way up ever since and currently sit at about $95 per share today. Because of this, it is clear that customers are not thrilled with Dollar Tree’s decision to start selling items over a dollar, but the change probably wouldn’t have taken place if it weren’t for inflation and the economic crunch created by the pandemic.
Today’s consumer goods are costing more than usual because of an increase in shipping costs and overall inflation of the market. This is why retailers are feeling the pressure to raise their prices in order to beat off inflation, but this has made customers unhappy.
Although Dollar Tree stores will now start selling items for more than a dollar, the company claims to still be committed to one thing it has been working toward for the entire length of its stay in the economy – providing value to customers. Deals will still be available in the dollar store shop even though some items will cost more than they previously did.
“We will continue to be fiercely protective of that promise, regardless of the price point, whether it is $1.00, $1.25, $1.50,” Witynski said.