Transitory inflation becomes permanent consumer reality

Economists can posit that tariff induced inflation is transitory, but it feels very real to consumers.

Transitory inflation becomes permanent consumer reality
Photo by Yassine Khalfalli / Unsplash

Jerome Powell's reassurances that tariff-induced inflation will be "transitory" may align neatly with economic theory but consistently fail to match consumer reality.

For executives, the repeated use of this language signals a dangerous disconnect between institutional messaging and market experience.

What the data actually shows

  • Impact of anchored expectations on inflation persistence: When inflation expectations are well-anchored, inflation rates tend to return to target levels more swiftly following economic shocks. Conversely, poorly anchored expectations can lead to prolonged deviations from inflation targets, exacerbating inflation persistence. (Expectations' Anchoring and Inflation Persistence, International Monetary Fund.)
  • Spending Power Divergence: Approximately 60% of American consumers hold just 20% of total spending power, making them highly vulnerable to even small, prolonged price hikes (The U.S. Economy Depends More Than Ever on Rich People, WSJ).

Corporate opportunism or strategic misstep?

The phenomenon labeled as "greedflation"—corporate price hikes maintained long after input costs stabilize—can boost short-term margins but risks significant long-term brand erosion.

Companies reporting historically high margins under the guise of inflation-driven necessity face growing consumer scrutiny and regulatory risk.

Companies getting it right

Executives should note companies like Costco and Patagonia, who strategically prioritize transparent communication around pricing. Both brands have effectively aligned consumer expectations with their pricing strategies, maintaining consumer trust even during inflationary volatility.

Research published by Harvard Business School, Lifting the Veil: The Benefits of Cost Transparency, argued:

Specifically, building on the psychology of disclosure and trust, we posit that cost transparency, insofar as it represents an act of sensitive disclosure, fosters trust. In turn, this heightened trust enhances consumers’ willingness to purchase from that firm.

Strategic recommendations for executives

  1. Transparent price communication: Clearly articulate how input costs impact pricing, distinguishing temporary from structural increases.
  2. Scenario planning: Incorporate consumer perception into financial models, forecasting prolonged inflationary scenarios beyond Fed predictions.
  3. Monitor consumer sentiment closely: Invest in real-time market data to rapidly adapt pricing and communication strategies.

The bottom line for executives

The existential challenge isn't predicting the duration of inflation but managing consumer perception and trust.

Economic theories expire, consumer realities endure, and executives face the pivotal task of bridging the credibility gap through transparent, consumer-oriented market practices.