With inflation decreasing, corporate America is not in a hurry to increase prices.

• The Federal Reserve has indicated that it may reduce interest rates by three percent in 2024, which will positively impact not only the stock market but also mortgages, auto loans, and all types of consumer debt.
• Corporations are experiencing pricing power that has been rare in recent decades, and prices throughout the economy won't decrease as quickly.
• Real income gains are being seen by Americans as wage growth surpasses inflation, further benefiting consumers and allowing companies to retain their margin gains.

Recently, President Biden has been making efforts to blame big corporations for high prices.

“Too many things are unaffordable,” the president said.

“Stop the price gouging,” Biden said on another recent occasion.

The president has taken steps to ease consumer financial stress, including forgiving student debt, eliminating "junk fees," and reducing key drug prices through new powers granted by the Inflation Reduction Act.

Despite recent research suggesting that corporations may not need to take advantage of the current inflationary era as much as they have, political pressure is likely to keep them from changing their ways.

While the Federal Reserve has indicated that it is comfortable with the decline in inflation and may not entirely disagree with the market view that rate cuts are the next phase in its monetary policy, corporations are not discussing cuts in a major way.

The central bank is considering a significant change, and Fed presidents have been thinking about it. Richmond Fed President Tom Barkin, a former corporate sector CFO, stated that he closely monitors and discusses price setting with companies. According to Barkin, who will be a voting member of the FOMC next year, companies will not relinquish their ability to increase prices until they are forced to do so.

Over the past two decades, price setters have been beaten up by the combination of ecommerce, globalization, access to new supply, and the power of big box retailers. In 2018-2019, people didn't think they had the power to raise prices, but now some are taking a step back and looking to get more price.

In November, during an interview with Barkin at CNBC's CFO Council Summit in Washington, D.C., the topic of pricing plans for 2024 was discussed. An informal poll of CFO Council members in the room revealed that a majority of companies would be raising prices next year, while a minority said they would keep pricing the same. None of the companies indicated that they would be lowering prices.

Barkin stated that he is searching for the specific point at which outsized price increases are no longer being implemented due to concerns about market sustainability and volume.

In some goods markets, the decline in Covid demand has led to a decrease in purchases for the home due to high mortgage rates in the real estate market. Additionally, the recession in the freight market has lowered transportation costs for shippers after a period of increased contract rates during the pandemic boom. Furthermore, a recent decline in energy prices has reduced input cost pressures.

According to CFO Richard Galanti, inflation for the quarter that ended was within the 0% to 1% range. However, the most significant changes occurred in "big and bulky items," such as furniture sets due to lower year-over-year freight costs. Additionally, "things like domestics" also experienced some movement. On the other hand, Galanti referred to "deflationary items" as being steeply down in price, with some items experiencing a decrease of up to 20% to 30%.

No one wants to be the first to cut prices

Diane Swonk, KMPG chief economist, stated that although inflation is falling faster than wages, this does not mean deflation. The Fed's stance this week may allow companies to maintain prices if real wage growth is sustained, with the goal of keeping the trend going so that consumers can regain purchasing power lost to inflation.

If interest rates are eased, the central bank is "ready to take a risk and accelerate economic growth rather than risk a recession," Swonk said. This represents a significant shift from last year's stance. The decision to halt rate hikes was expected to trigger financial markets to relax, which would be like a covert rate cut. This move will stimulate the economy. While inflation is expected to improve, the pace at which it slows down could be slowed.

The recent positive trends in the freight market may soon come to an end, according to a logistics CFO who spoke on a CNBC CFO Council call on Tuesday. After a prolonged period of a freight recession, the market may have reached its trough, and truck rates may start to increase from their current lows.

Although the Fed may desire a "soft landing" for the economy, it does not guarantee that prices will also soften for consumers, according to Marco Bertini, a professor of marketing at business school Esade who specializes in pricing strategy and psychology. "Companies will do what they want and will never react as quickly as you want them to, especially after they have been raising prices," Bertini stated. "Why would I be the first to reduce my margins when we just experienced a period where we had the perfect excuse [inflation] to increase them?" he asked.

The U.S. market is uncharted territory for companies as they reassess their pricing strategy during a period of rapid inflation, with margins more than recovered for many.

No CFOs at the CNBC CFO Council Summit raised their hands when asked if they were considering a price decrease for 2024.

If I were the first to declare that I am maintaining prices and communicate this to customers, it would spark a price war, and the advantage of being the 'good guy' would only last for two seconds," Bertini stated. "Nobody desires a race to the bottom. The benefits gained over the past few years would vanish in a matter of months.

Deflation versus slowing of price increases

Despite recent declines in pricing, companies are not likely to continue in that direction for all products and services.

One retail sector CFO stated on a recent CNBC CFO Council call that the Fed does not desire deflation, but rather wants inflation to moderate. Additionally, the CFO stated that the Fed wants the economy to reach a point where price increases become unsustainable.

The CFO stated that despite a recent "settling in the market," it is not deflation.

Transportation costs are causing deflationary forces that affect importers, but this is a one-time release of supply and demand imbalances. It is a price correction that differs from deflation. We have experienced an interesting phase of price correction, but things are stable from our perspective.

Despite the ongoing deflation of key commodities in food distribution, restaurant customers will not notice a decrease in prices when dining out.

Restauranteurs have raised prices, but they are seeing deflation in their ingredients, which may lead to better performance in their bottom line. However, it is unlikely that they will lower prices quickly.

According to Bertini, the science of pricing states that if a company can attribute higher input costs as the reason for higher prices, the buyer will accept the situation, resulting in price stickiness.

The current environment is becoming increasingly unstable.

When inflation is in the public eye, it's ideal to collaborate legally to increase prices. Now, the shocks have subsided, and costs are gradually decreasing, and the desire to be the first to lower prices and gain market share is growing. However, being the first will take some time because they are still enjoying it. In most markets, what it will take is a competitor who sees a clear path to gaining a significant market share.

When the party will end for corporations

The balance between anticipating a slowdown in spending and the reality of strong retail sales is proving challenging.

The logistics CFO stated on the recent CNBC CFO Council call that it is difficult to determine how strong November retail sales should have been compared to normal and the past three years, as we are still trying to understand the factors that influenced them.

Costco CFO Galanti's view on food after the company's earnings this week is informative. He stated that the situation with food is different from goods, as there have not been significant price cuts passed on to consumers yet.

We have observed a slight decline in some commodity components and shipping costs, but no significant trend. We are actively working with our vendors to lower prices and will continue to do so as we see more opportunities.

If the period of price increases ends, there will likely be a delay before other economic forces, such as the Fed, take action. As Bertini put it, 'Who wants to end the party early? They will want to see some really strong evidence that the party has ended.'

Another analogy from a CFO on the recent CNBC Council call may have put it best:

We are all like vehicles on a highway. There's the customer, the retailer, the manufacturer, and possibly investors. Who will be the first to apply the brakes? Who wants to stop before the person in front of them does?