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More signs emerge that inflation is altering shopping habits

Signage for Unilever is shown at an entrance to the company’s headquarters in Rotterdam, Netherlands, on Feb. 8.  (Bloomberg )
By Jason Karaian, Isabella Simonetti </p><p>and Julie Creswell New York TImes

A day after Walmart warned investors that its profit would shrink as rising prices moved shoppers to make fewer purchases at its stores, Unilever, Coca-Cola and McDonald’s, three other consumer-facing giants, reinforced the message, to different degrees, providing a window into how companies are navigating this fragile economic moment.

On Tuesday, Unilever, the maker of Dove soap, Ben & Jerry’s ice cream and Hellmann’s mayonnaise, said it raised prices until they were 11% higher than in the same quarter last year, offsetting a 2% decline in the volume of things that consumers bought.

It was the fourth consecutive quarter in which prices outpaced volume growth at the company.

Unilever raised its forecast for revenue this year but said its profit would most likely be at the bottom of its expected range, held back by a sharp increase in the prices of plastics, palm oil, aluminum and other commodities it uses as inputs.

Alan Jope, Unilever’s chief executive, said on a call with analysts that “peak cost inflation” was likely to come in the second half of the year.

Sales volumes may fall more in the second half than the first, Jope said, “as the full impact of pricing lands.”

Passing higher prices on to shoppers has led some to buy less or trade down to cheaper store brands, Unilever’s results suggested, a trend also seen in Walmart’s recent financial reports.

To keep its higher-priced brands in consumers’ minds, Unilever said that it added about $200 million to its marketing budget in the first half of the year, another factor that put a dent in its profits.

Investors appeared heartened by Unilever’s ability to balance prices and costs, with its London-listed shares rising more than 2%.

Coca-Cola’s stock also traded higher on Tuesday, rising 1%, after it reported better-than-expected revenue growth in the second quarter, driven by a double-digit percentage rise in prices.

Crucially, it also recorded growth in the volume of drinks it sold, suggesting that shoppers are sticking with favored brands despite higher prices.

In a similar vein, Unilever noted that it sold more ice cream in the quarter, one of its few product categories to register volume growth.

Consumers’ willingness to pay higher prices has “largely held up better than expected,” James Quincey, Coca-Cola’s chief executive, said on a call with analysts.

“We are watching closely for signs of changing consumer behavior as the year goes on and as the average cost of the consumer basket continues to go up.”

Like Unilever and its closest rival, PepsiCo, which reported results this month, Coke raised its revenue forecast for the year.

And like at those companies, prices are rising faster than volumes, which when combined with rising commodity and transportation costs has dented profits.

Coca-Cola reported a 28% fall in profit for the second quarter, compared with the same period last year.

McDonald’s, the fast-food giant, said revenue at its restaurants, excluding those it sold in Russia, grew by almost 10% partly because of “strategic menu price increases,” it said.

Its stock rose by more than 2%.

On a call with analysts, executives at McDonald’s said that while consumers have generally accepted higher prices for Big Macs and other items, lower-income customers are beginning to trade down to less expensive menu items, like those in its “value” range, or choosing fewer combination meal deals.

The situation in Europe is even murkier, McDonald’s executives acknowledged, as inflationary pressures there are expected to remain high throughout the year.

“The inflationary pressures in Europe are elevated even beyond what we’re seeing in the U.S.,” said Chris Kempczinski, the chief executive of McDonald’s, “and that’s having an impact on consumer sentiment and what we’re needing to do from a menu board and pricing.”

The upbeat parts of Tuesday’s earnings reports weren’t enough to buoy Walmart’s stock, which fell about 8%, making it the worst-performing stock in the S&P 500 for the day.

The retail giant’s warning that it would need to continue marking down inventory that wasn’t selling because many shoppers were shifting to cheaper, lower-margin products showed how quickly inflation has gripped the economy.

Last month, Target also warned that its profits would be lower because of inventory markdowns.

The Federal Reserve is expected to act aggressively this week to rein in stubbornly high inflation with another large interest-rate increase, a move designed to cool consumer demand that may, ultimately, tip the economy into recession.Concerns over the outlook for the global economy helped drag down the S&P 500 stock index by 1%.

Consumer staples, the industry that includes Coca-Cola and Walmart, fell 1%, while consumer discretionary stocks, which include McDonald’s, fell further, down more than 3%.