Inflation erodes the purchasing power of your dollars over time. As the price of goods goes up, a single dollar purchases less and less. When inflation occurs suddenly, consumer spending habits may change as people eat out less, buy in bulk and switch brands.
Inflation is driven by supply and demand. When consumers demand more goods than inventory can supply, or when the prices of production and shipping go up, consumer prices also rise.
Though the underlying mechanism may vary, inflation ultimately eats away at your purchasing power over time. However, this occurs slowly in “normal” years, as the Federal Reserve takes measures to keep inflation around 2%. But Covid-19 has thrown “normal” out the window.
One result of the pandemic is clogged supply chains. This has led to unusually high inflation that’s measurable not just in the pricing indices but consumer spending habits, too.
The State of Inflation in 2021
Early in 2021, the U.S. Federal Reserve warned consumers that inflation was coming. However, the Fed’s chair, Jerome Powell, cautioned Americans to keep their heads, noting that inflation would probably be a transitory outcome of the pandemic. The Fed also indicated that inflation would likely taper off by early 2022.
But it seems that inflation is holding firmer than expected, driven by government spending, consumer demand, and unprecedented labor shortages. As a result, the Bureau of Labor Statistics (BLS) reported that the cost of goods rose 5.4% year-over-year (YOY) in September.
By October, that number had risen to 6.2%, the highest YOY inflation leap in over three decades. And though wages are on the rise, they’re not climbing fast enough to catch up. The outcome of these opposing pressures has led to shifts in consumer spending habits – though some sectors are hit harder than others.
For instance, in August, port congestion and fishing labor shortages caused seafood prices to soar 11%, leading to restaurants around the nation slashing fish from the menu. By October, seafood inflation hit nearly 14%.
The semiconductor chip shortage alone is responsible for much of this year’s astronomical inflation numbers. This particular shortage has led to inflated prices in several sectors, affecting everything from phones and laptops to larger electronics like cars and appliances like fridges and laundry machines. In each case, prices have risen anywhere from 10 to 45%, if not more.
Consumer Sentiment and Inflation: An Inverted Relationship
Generally speaking, it’s safe to say that inflation and consumer sentiment share an inverted relationship. When inflation soars, consumer confidence in the economy often tanks. This year in particular, consumers are far less confident than the Fed about the transitory nature of inflation as it hits where it hurts: their pocketbooks.
A Country Financial survey found that 88% of Americans are “highly concerned” about inflation. A second study found that 40% of U.S. consumers hold a negative outlook on the economy – especially those who haven’t financially recovered from the pandemic. And when consumers are worried about the economy, they tend to shift their shopping habits.
Numerator, a market research firm, also took an interest in the inflation-consumer relationship this year. In June, Numerator ran a small study (600 people) to examine current consumer behaviors and sentiment. From their results, Numerator concluded that:
- 83% of consumers noticed that prices were rising
- 66% of consumers expected groceries and household essentials to increase in the next six months
- 54% of consumers were worried about future price increases
- Up to 95% of consumers planned to change their shopping behavior if inflation continued
- 60% of consumers planned to switch to lower-priced options
- 50% of consumers planned to seek out additional discounts and promotions
- 49% of consumers planned to slash their discretionary budget
The study also found that a mere 8% of respondents wouldn’t change their shopping behavior at all due to inflation.
How Consumers Respond to Inflation
Numerator ran a much larger study (over 14,000 people) in September to see how record inflation levels impacted consumer behavior. According to this recent data, shopping trends had indeed shifted due to rising prices. Country Financial and Salesforce also compiled data in September and October to shed more light on the subject.
Together, the data from these three companies highlights several noticeable changes in how (and where) consumers spend their dollars in high-inflation environments.
1. Consumers are buying cheaper…
According to data from Numerator, after a high-inflation summer, around 20% of consumers surveyed noted that they will or already had switched to cheaper brands. Around 17% also stated that they’d changed where they shopped, opting for retailers and discount stores with consistently lower prices. And another 17% noted that they often shopped sales or used coupons.
Data from Salesforce supported this finding, showing that consumers shopped for cheaper products and brands when faced with inflation. One common area that consumers switch it up is in their grocery budgets. For instance, shoppers may switch from steaks to ground beef or fresh produce to canned or frozen varieties.
2. They’re buying less often…
Data from Numerator and Country Financial revealed that 48-74% of consumers planned to or did reduce their spending in other categories, such as:
- Bars, restaurants, and takeout
- Travel
- Holiday presents and food
- Apparel
Salesforce data also revealed that as prices go up, consumer shopping goes down. For instance, in the United States, online orders declined 7% in the last year.
3. Or they’re not buying at all.
Unsurprisingly, data from all three firms showed that many consumers are willing to stop buying certain products or categories altogether.
For instance, many consumers are slashing electronics purchases from their budgets entirely. Around 30% of adults are also skipping upgrades for personal devices such as phones and laptops.
Ultimately, nonessential items fare the worst in this category. When inflation goes up, customers are most likely to stop buying toys, new furniture and household items, and garden supplies.
4. Many rely on new payment methods to make their transactions.
According to Salesforce, some shoppers navigate higher prices by opting for new payment methods. This is highlighted in the 66% YOY increase in buy-now, pay-later plans as customers move away from higher-interest credit card purchases. This trend may also accelerate the adoption of mobile wallets as consumers seek lower prices and more convenience online.
5. Consumers have limits.
But even in the face of high inflation, there are just some items that consumers won’t switch up or go without. This list is primarily comprised of goods that impact their health and family, such as beauty and personal care products, pet food, and infant and toddler supplies.
Combating Inflation with Smart Spending and Investing Choices
One of the best ways to navigate a high-inflation environment is to make smart spending choices. For instance, you may shop sales, start using coupons and discount codes, or opt for buy now, pay later plans. Many consumers are also switching stores or shopping online to cut costs wherever possible.
But if you want to come out ahead when inflation soars, the best thing you can do for your future is to invest and outpace inflation with your portfolio returns. While there are no guarantees, seeking out high-interest savings accounts and AI-backed investment models can help you not only preserve your wealth but get ahead of the game.
And if you’re not sure where to start, we here at Q.ai are happy to help you beat inflation – before inflation beats you. Q.ai has put together an Inflation Kit that responds to the economy’s direction by giving you a defensive bunker against the inflating dollar.
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