We never were the same after last summer.
Stubbornly high inflation rates in recent months and several interest rate hikes by the U.S. Federal Reserve are impacting consumer behavior. That’s according to company earnings reports, market-data analytics and consumer surveys.
Inflation reached 8.2% in September on the year, the Bureau of Labor Statistics said Thursday, clinging to a four-decade high. Most economists expected a September inflation rate of 8.1% year-over-year, after August’s 8.3% annual increase.
The cost of living increased 0.4% from August to September. But the “core” numbers that strip away volatile food and energy costs rose 0.6% month to month when Wall Street forecasters were expecting a 0.4% rise.
Ahead of the market open Thursday, futures for the Dow Jones Industrial Average
DJIA,
S&P 500
SPX,
and Nasdaq Composite
COMP,
all plunged after the hot inflation numbers.
Rattled by the rise in the cost of living in recent months, millions of people have already been taking action to conserve their cash, according to recent McKinsey & Co. report that explored the ways people are trading down.
“Whether it’s at gas pumps or in grocery stores, people across the United States have been feeling a pinch in their pocketbooks this summer,” it said. “Inflation is the highest it’s been in decades, and consumers are worried and jittery.”
“‘Consumers also tend to disagree on the outlook for inflation more than experts do, they change their view less often, and they often rely on a few key products they consume regularly.’”
With inflation at a 40-year high, McKinsey said, “The mood has turned darker. Thirty percent of our respondents say they are feeling pessimistic, and that we may be headed toward one of the worst recessions we’ve ever seen.”
Inflation has become a stark — if bleak — reality for some people, especially when shopping for food — like this California woman who told MarketWatch that she buys less vegetables, or freezes them to get more bang for her buck.
Once consumers have made up their minds that inflation is a problem, and it’s here to stay, they’re less likely than economists to change their minds, said Carlo Pizzinelli, an economist at the International Monetary Fund’s research department.
“Consumers also tend to disagree on the outlook for inflation more than experts do, they change their view less often, and they often rely on a few key products they consume regularly — such as coffee and gasoline — to extrapolate changes in the overall cost of living,” he wrote in this research paper.
Consumers are changing their behavior
• Three quarters of consumers said they were engaging in some sort of deal-seeking: 60% were adjusting the quantity of what they were buying. That means either opting for large amounts at lower unit prices or smaller amounts.
Some retailers appear to be reaping the benefits: Costco Wholesale
COST,
— which can sell groceries in bulk in addition to a $1.50 hot dog and soda combo — just had a strong September, with comparable sales rising 8.5% from the same point last year.
• 44% of people told McKinsey they were delaying purchases on non-essential items. Lower-income shoppers tended to single out certain groceries, home improvement, footwear and apparel as the items bound for a pause.
“Consumers are searching for bargains in clothing and footwear, buying in bulk for economies of scale, delaying purchases on non-essential items, and are switching to lower-price retailers.”
• More than one-third (37%) of McKinsey’s respondents said they were switching retailers for lower prices or discounts. They are also eyeing lower prices from generic brands and using ‘buy now pay later’ programs, McKinsey noted.
Some retailers have already been rolling out bargains. In late September, Nike
NKE,
announced price-cutting efforts to help get off-season clothing out of warehouses, and executives at the athletic apparel giant expected rivals to do the same.
During an August earnings call, Dollar General
DG,
CEO Todd Vasos said a more diverse range of customers from income levels of $100,000 and up. “We really are encouraged in seeing, a younger consumer, a little bit more affluent,” he said.
“Many people are planning to cut back on dining out, travel, electronics, plus toys and games, as they are learning to live with feelings of insecurity that rising prices bring. ”
• Three quarters of consumers are taking a dim view of discretionary spending, according to a separate survey carried out last September by Numerator, a consumer markets and analytics firm.
Many people already know where they are planning to cut back — starting with dining out, travel, electronics, plus toys and games — as they are learning to live with feelings of insecurity that rising prices bring.
Earnings season will give economists a better insight those feelings. Third quarter earnings results are also set to start rolling out Friday, giving another look at customer spending — and whether companies are maintaining their profit margins.
