Producer Prices Signal More Margin Pressure for Main Street Retailers

Smaller increases in inflation have given investors reason to cheer in recent days.

But the latest Producer Price Index (PPI) data hints at more pressure ahead for Main Street SMBs, and particularly retailers, which have been struggling.

This time around, wholesale prices, as measured in the PPI, and reported by the Bureau of Labor Statistics, were up 8% from a year ago. That’s a slowdown from double-digit percentage rates seen earlier in the year. And stripping out the most volatile inputs such as energy, the year-over-year “core” PPI increased 6.7%.

Generally speaking, the PPI serves as a read across for the commercial space, as it’s tied to the prices that suppliers charge other businesses at a wholesale level. Thus, inflation continues to make its way across supply chains … and eventually makes its way to consumers’ sticker shock.

But even if inflation growth is moderating (over the longer term), growth is still growth. The SMBs that drive the U.S. economy still are grappling with the fallout of higher wages and other input costs.

As detailed in recent PYMNTS research on the state of these Main Street mainstays, the rate of improvement, as measured by our proprietary index, has stalled, at 0.7%. These companies are still finding it tough to navigate wage pressures. Elsewhere, we’ve found that 12% of Main Street SMBs are doubtful they will still be in business in 2024.

In an environment where 70% of the SMBs we surveyed said supplier costs have risen over the last year, with 57% of them raising prices as a result, the read across from the latest PPI data shows that the trends look set to continue. Margins may continue to be squeezed as a result.

Retail Looks Vulnerable

One sector that looks increasingly vulnerable is retail. The latest Main Street PYMNTS’ readings show that retailers are lagging other verticals when it comes to the recovery. Drill down a bit, and the pain is being felt most keenly by the brick-and-mortar retailers that are the storefronts that tend to be fixtures of the local community (they’ve declined throughout and coming out of the pandemic). The PPI does not bode well for this segment, because the prices paid at the wholesale level for, say, electronics, for pet food, for beverages — in short, many items that stock shelves — were up in October.

Much depends on the holiday shopping season, which begins in earnest in just two weeks. There are already indications from earnings season that many consumers are pulling a bit on the purse strings, and are not buying whatever they deem that’s not essential.  Living paycheck to paycheck still dominates — and consumers of all financial lifestyles purchase groceries above everything else. Discretionary spend is more, well, discretionary as 46% of consumers living paycheck to paycheck with issues paying bills purchased clothing and accessories in the prior 30 days (in September) and 36% purchased beauty or cosmetics products.