McDonald’s, $MCD, and other big brands warn that low-income consumers are starting to crack

Some of the most well-known corporations in America are reporting that their consumers are feeling the pinch of inflation as prices continue to rise.

Inflation has been a major topic of discussion in corporate America over the past three years, following the easing of monetary policy and the injection of trillions of dollars in Covid relief. While the rate of price growth has slowed since the Federal Reserve began raising interest rates in early 2022, consumers are still feeling the pressure, often tightening their budgets as costs keep climbing.

"Consumer pressures persist around the world," said McDonald's CEO Chris Kempczinski on the fast-food chain's recent earnings call. "Consumers are more discriminating with every dollar they spend as they face elevated prices in their day-to-day spending."

Steady inflation has cast a shadow over how ordinary Americans view the economy's health. Consumer confidence hit its lowest level since mid-2022 in April, according to data from the Conference Board, with high prices remaining a top concern.

While worker pay has been rising, as shown by first-quarter employment cost statistics, prices paid by consumers have also increased, eating into the extra income from those higher wages.

It's important to note that while the rate of inflation has fallen significantly, it remains above the 2% goal set by the Fed. The consumer price index, a measure of a broad basket of goods and services, rose at an annual rate of 3.5% in March compared to the same month a year ago.

This persistent 3.5% annual growth is dampening economic sentiment. Even after a period of high inflation, prices aren't actually falling, which is concerning for companies like McDonald's and others serving customers who are experiencing sticker shock.

At McDonald's, this was reflected in same-store sales growth slightly below Wall Street expectations. Kempczinski highlighted the need for the company to focus on affordability to attract diners as prices deter low-income consumers.

Other companies, like 3M and Newell Brands, are also feeling the impact of inflation. While 3M's earnings and revenue exceeded expectations in the first quarter, management anticipates muted consumer spending this year due to continued softness in consumer discretionary spending. Newell Brands also issued soft guidance for current-quarter earnings, citing pressure from consumers managing their discretionary spend as inflation outpaces wage growth.

However, not all consumer-facing companies are experiencing the same challenges. Colgate-Palmolive's CEO noted that volume growth has largely returned as inflation has become more benign, and pricing has stabilized. Coca-Cola's management has observed a greater emphasis on value among consumers but believes that the American consumer, across income levels, remains in good shape.