Think everything's expensive now? Get ready for what's next

Consumers around the world are about to get socked with even higher prices on everyday items, companies from food giant Unilever Plc to lubricant maker WD-40 Co. warned this week as they grapple with supply difficulties.

The maker of Dove soap and Magnum ice-cream bars jacked up prices by more than 4% on average last quarter, the biggest jump since 2012, and signaled elevated pricing will continue into next year. A similar refrain came from Nestle SA, Procter & Gamble Co. and Danone SA, whose products dominate supermarket aisles and kitchen cupboards.

“We’re in for at least another 12 months of inflationary pressures,” Unilever CEO Alan Jope said in a Bloomberg Television interview. “We are in a once-in-two-decades inflationary environment.”

Companies are facing a dire mix of supply-chain challenges, as well as higher costs for energy, raw materials, packaging and shipping. While most consumer-goods makers reporting results this week expressed confidence that they’ll be able to limit the long-term hit to profitability, that means the pain passes to consumers, upping the squeeze on pockets as Christmas approaches.

U.S. inflation has accelerated rapidly this year to the strongest since 2008. Across developed economies, the post-pandemic supply-demand imbalances have pushed the rate above 4% for only the second time in the past two decades.

In the U.K., the cost of hedging against inflation over the next decade rose on Friday to the highest level in 25 years.

The return of pricing power marks a sea change in the global economy and poses a new challenge for central bankers after years of undershooting inflation targets. They’re trying to figure out whether they should quicken the removal of stimulus from pandemic-hobbled economies, or stand pat because the price spikes are temporary.

“This is a story that’s consistent across the world,” said Jennifer Lee, senior economist at BMO Capital Markets. “It’s just something consumers have to resign themselves to right now.”

Companies typically raise prices gradually, which is why the start of an inflationary period usually damages profitability the most. If they pass on cost increases too quickly, shoppers will shift to cheaper products from competitors or put off purchases. Some are also locked into contracts, creating a delay in households feeling the pinch.

“You can’t pass on increases from one day to another,” Nestle CEO Mark Schneider said on Bloomberg TV this week. “But now that action is underway.”

Nestle’s overall pricing rose 2.1% in the third quarter, the fastest in at least five years. 

Consumers in emerging markets have so far faced the biggest inflation, as seen in Nestle’s results. The Swiss food giant, which makes Nespresso coffee and DiGiorno pizzas, raised pricing in such countries by 2.6% in the first nine months of the year, three times the rate of developed markets. Schneider expects margins to drop this year given the time lag required to pass on higher costs. Then they should resume improving in 2022.

“What we see from the inflation front is that the situation is going to get worse and then of course we’re working on pricing to make up most of that,” Schneider said.

Danone has also indicated that shoppers in Europe and the U.S. won’t escape the squeeze. It expects costs to rise about 9% in the second half of the year. “We could see even higher inflation rates next year,” Chief Financial Officer Juergen Esser said on a conference call.

P&G, the maker of Downy fabric softener and Puffs facial tissues, expects $2.3 billion in expenses this fiscal year from elevated commodity and freight costs. It’s increased prices on numerous products and says the situation will continue to “evolve.”