Consumer Goods Companies See Lower Raw Material Costs, But Will Shoppers Benefit From Lower Prices?

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Consumer goods companies around the world are paying less for raw materials and energy, but it may take some time before shoppers see significantly lower price tags for their household goods. The rise in expenses for everything from sunflower oil to milk and grain over the past two years has hit the packaged goods industry hard. Companies have hiked prices to compensate, and this has contributed to a cost-of-living crisis in many parts of the world. Cost inflation rose during the COVID-19 pandemic, and the situation was worsened by Russia's invasion of Ukraine, which sent energy prices soaring to record highs last year. Energy costs have since dropped, and global prices for some commodities are rising at a slower pace.

According to Reckitt Benckiser, cost inflation will be "significantly" lower this year, with expectations of a 5% to 9% level compared to 18% last year. While salary costs have increased, some other costs, such as freight, have declined. However, it is unclear when companies may start passing on some of their lower costs to customers. The European Central Bank is concerned that if food inflation keeps accelerating, it will have an outsized impact on consumers' inflation perception, potentially changing spending behavior, pressuring wage demands, and impacting interest rates. The rise in prices has highlighted the value of companies' brands and pricing power, and it remains to be seen which companies can pass on prices through a difficult consumer environment.

In the first quarter, companies like Nestle, Reckitt Benckiser, and Danone raised prices for their goods significantly, even though input price rises have eased, and costs are expected to moderate further. However, companies including Unilever and Associated British Foods acknowledged that the industry was past "peak inflation, but not yet past peak pricing." Many in the industry bought ingredients far in advance when prices were higher, so it will take time for that to trickle through to the supermarket shelves. In any case, it may take some time for shoppers to see significantly lower price tags for their household goods.

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