September 29, 2023

Hi everyone. My name’s Taylor St. Germain with ITR Economics, and welcome to this episode of Trends Talk. I wanted to discuss a relationship that’s become very important given this phase of the economic cycle that we’re in, and that relationship is the relationship between an inflated series and a deflated series. It’s a conversation that we have a lot with our clients that we consult with on a regular basis, and also something we’re sharing more and more as we travel the US and deliver macroeconomic presentations. The reason that this relationship is so important is because of the inflationary pressures that we’ve all been under throughout the last few years.

It’s not uncommon to look at a company’s data and see that their sales are well elevated above their volume. There’s this big divergence between sales and volume series, and that’s because of these inflationary pressures. A lot of organizations that we work with and that we’ve interacted with have had record high sales numbers in this post pandemic era between the second half of 2020 and the majority of 2023. However, if you look at a volume series, a deflated series, maybe a product of theirs, it’s clear that there’s a big deviation and that a lot of the growth has come from price increases rather than organic growth in volume. Especially as we move into this backside of the economic business cycle, we’re in Phase C Slowing Growth for the economy right now with this mild recession projected in 2024, it’s going to be much more challenging to move that needle in terms of sales, in terms of the inflated series because of the disinflation that we’re experiencing.

Yes, we were all passing along price increases throughout the last few years and some price increases outpacing inflation, which was impacting our top and bottom lines as organizations. Now that pricing pressure, it’s much more sensitive, so we’re not going to be able to grow through price increases in the rest of this year and into 2024. Many of our clients said there’s already this downside out there in pricing pressures. We really need to start focusing on those deflated series again and start growing organically from a volume perspective because it’s going to be much harder to be growing simply through price increases.

A great way to look at this relationship is by looking at US total retail sales. We’ve talked about retail sales on past Trends Talks episodes, and what we can see is that retail sales is slowing down. Retail sales is in Phase C Slowing Growth. The annual growth rate at the time of this recording is 4.5%. That’s the 12/12 rate of change, the 3/12 rate of change down at 2.2%. Now that’s an inflated series, so inflation is impacting that data series. However, when we deflate retail sales and look at a deflated series, that series is already in Phase D Recession. It’s at -0.9% at the time of this recording. It’s a really interesting comparison. Inflated retail sales positive 4.5%, deflated retail sales about -1%, -0.9%.

It’s really important that as management teams, as business leaders, as sales and marketing individuals, we’re looking at this relationship between sales and volume, and we’re understanding how much of the growth over the last few years was related to price increases. Because based on this disinflation, it’s going to be much more challenging to pass along these price increases as we go deeper into ’23 and certainly into that period of disinflation in 2024. It’s all about understanding this trend and really focusing on growing volumes as we move further into the future because we simply won’t be able to survive on growing those numbers on just price increases alone given the change in this environment.

I hope you found this information helpful. Thanks for joining me on this episode of Trends Talk with ITR Economics. I’m Taylor St. Germain, and I’ll see you on the next one.