A LONG LINE of unsold 2024 Atlas commercial vehicles is displayed at a Volkswagen dealership in Denver on July 28. (AP Photo/David Zalubowski)

WASHINGTON (AP) — The big inflation spike of the past three years is almost over, and economists are thanking American consumers for helping to curb it.

Some of America’s biggest companies, from Amazon to Disney to Yum Brands, say their customers are increasingly seeking out cheaper alternatives to products and services, hunting for bargains or simply avoiding items they find too expensive. Consumers aren’t cutting back enough to cause an economic downturn. In fact, economists say, they appear to be returning to pre-pandemic norms, when most businesses felt they couldn’t raise prices much without losing customers.

“Even though inflation is coming down, prices are still high, and I think consumers have reached the point where they just won’t accept it anymore,” Tom Barkin, president of the Federal Reserve Bank of Richmond, said this last week at a conference of business economists. “And that’s what you want: the solution to high prices is high prices.”

A more price-sensitive consumer helps explain why inflation appears to be declining steadily toward the Federal Reserve’s 2% target, ending a period of painfully high prices that strained many people’s budgets and clouded their outlook for the economy. It also became a central theme in the presidential election, with inflation leaving many Americans sour on the Biden-Harris administration’s handling of the economy.

Consumers’ reluctance to continue paying more has forced companies to slow — or even lower — their price increases. The result is a cooling of inflationary pressures.

On Monday, the Federal Reserve Bank of New York reported that Americans’ expectations about how much they will spend over the next 12 months have fallen — and so has their outlook for inflation. According to a New York Fed survey, consumers expect their spending to grow by 4.9% over the next year. That’s the lowest reading since April 2021, when inflation began to rise.

And they expect inflation to average just 2.3% over the next three years, the survey found, the lowest figure since the study began in 2013. Consumers’ expectations about inflation can be self-fulfilling: When households expect low inflation, they often delay purchases in the expectation that prices won’t rise much in the near future — and in some cases, they might even fall. This trend can keep price pressures low.

Other factors also helped rein in inflation, including the recovery of supply chains, which has made more cars, trucks, meat and furniture available, and the Fed’s high interest rates, which have slowed sales of homes, cars and appliances and other interest-sensitive purchases.

Still, a key question now is whether shoppers will pull back so far that the economy is in jeopardy. Consumer spending accounts for more than two-thirds of economic activity. With evidence that the labor market is cooling, a drop in spending could potentially derail the economy. Such fears sent stock prices tumbling a week ago, though markets have since recovered.

This week, the government will provide updates on both inflation and the health of the U.S. consumer. On Wednesday, it will release the consumer price index for July. It is expected to show that prices — excluding volatile food and energy costs — rose just 3.2% from a year earlier. That would be down from 3.3% in June and the lowest year-over-year inflation rate since April 2021.

And on Thursday, the government will report last month’s retail sales, which are expected to have shown a respectable 0.3% increase from June. Such a rise would indicate that Americans have become more vigilant about their money but are still willing to spend.

Many companies have noticed.

“We are seeing lower average selling prices… at this time as customers continue to opt for lower prices when they can,” said Andrew Jassy, ​​​​CEO of Amazon.

David Gibbs, CEO of Yum Brands, which owns Taco Bell, KFC and Pizza Hut, told investors that a more cost-conscious consumer has weighed on sales. Sales fell 1% in the April-June quarter at stores open at least a year.

“Ensuring we provide consumers with affordable options,” Gibbs said: “has been an area we have been paying more attention to since last year.”

Other companies are dropping prices outright. Dormify, an online retailer of dorm room supplies, is offering duvets starting at $69, down from $99 a year ago.

According to the Fed “Beige Book,” an anecdotal collection of company reports from around the country, published eight times a year. Companies in nearly all 12 Federal Reserve districts have described similar experiences.

“Nearly every district reported that retailers were discounting items or that price-sensitive consumers were buying only basic items, compromising on quality, buying fewer items or shopping around for the best deals,” according to the Beige Book last month.

Most economists say consumers are still spending enough to keep the economy moving consistently. Barkin said most businesses in his district — which includes Virginia, West Virginia, Maryland and the Carolinas — report that demand remains solid, at least at the right price.

“I would put it this way: consumers are still spending money, but they are choosing,” said Barkin.

In a speech a few weeks ago, Jared Bernstein, who heads the Biden administration’s Council of Economic Advisers, cited consumer caution as one reason why inflation is nearing the end of a cycle. “tour” back to the Fed’s 2% target.

Coming out of the pandemic, Bernstein noted, consumers were flush with cash after receiving several rounds of stimulus checks and cutting back on personal spending. Their improved finances “gave certain companies the ability to wield pricing power that was much less prevalent before the pandemic.” After COVID, consumers were “less sensitive to price increases,” said Bernstein.

As a result, “the old adage that the cure for high prices is high prices has been temporarily suspended,” said Bernstein.

So some companies raised prices even more than necessary to cover their higher input costs, boosting their profits. Limited competition in some sectors, Bernstein added, made it easier for companies to charge more.

Barkin noted that inflation remained low before the pandemic as online shopping, which makes comparison shopping easy, became more common. Major retailers also kept costs down, and increased U.S. oil production kept gas prices lower.

“A price increase was so rare,” Barkin said: “that if someone came to you with a 5% or 10% price increase, you almost threw them out, like, ‘How can you do that?'”

That changed in 2021.

“There is a labor shortage,” Barkin said.Shortages in the supply chain. And the price increases are coming from everywhere. Your gardener is raising your prices and you don’t have the capacity to do anything but accept them.”

Economist Isabella Weber of the University of Massachusetts at Amherst called this phenomenon “seller inflation” in 2023. In an influential article she wrote that “publicly reported supply chain bottlenecks” can “create legitimacy for price increases” And “create consumer acceptance to pay higher prices.”

According to Barkin, consumers are no longer so tolerant.

“People have a little bit more time to think about what it feels like to pay $9.89 for a 12-pack of Diet Coke, when I used to pay $5.99. They don’t like it as much, and so people make choices.”

Barkin expects this trend to slow price increases and reduce inflation.

“I’m actually quite optimistic that we’ll see good inflation numbers in the coming months,” he said. “All elements of inflation seem to be calming down.”