Continued High Inflation Impacting Consumer Behavior

With inflation at record levels throughout 2022, consumers are rethinking how they spend their money.
 
The inflation report released by the U.S. Bureau of Labor Statistics‘ for October 2022 shows the inflation rate is at 7.7%, down from 8.2% in September 2022. Although total inflation is consistently declining from the June peak of 9.1%, this will be a slow process and will not be uniform across categories. We are already starting to see a reduction in the price of goods, but services will likely be slower to adjust. Predictions show that we will end 2022 at 8% and end 2023 at about 3.5%.
 
United States annual inflation rates (2018 to 2022)
Source: US Inflation Calculator
As far back as July 2021, surveys showed that consumers were feeling the impacts of inflation and adjusting their purchasing behaviors accordingly. At the time, inflation was at 5.4%.
 
Consumer perception of inflation
 
Every product category is impacted differently, both from an inflation rate perspective, as well as how consumers perceive changes. According to a survey conducted by Morning Consult in July, consumers felt the largest increase in Gasoline and Grocery categories, which lines up with the actual inflation. Although both categories have started to come down, they are meaningfully higher than they were last year (gasoline +17.5% food at home +12.4%).

 

Source: McKinsey & Co. and Axios
Impact across income levels
 
While lower income individuals had to cut back spending and focus on essential items, the wealthiest group saw nearly no change, even increasing spending in some luxury areas. This duality is expressed by Target missing analyst expectations on Q2 while high end retailer Lululemon, overachieved their sales projections for Q2 and Ferrari exceeding expectations for Q3, raising their total year guidance.

High and middle income groups did experience strain in the form of market losses. According to data that Moody’s Analytics shared with The Wall Street Journal, the middle class has actually saved less than most people who make less than them since the pandemic began. Mid-priced stores, like Gap and Kohl’s are seeing less spending per visit, contributing to them reducing their financial outlook. The most recent US Census Bureau’s Monthly Retail Sales Report reflects this, showing a monthly decrease in most non-essential spending categories, with the exception of food and clothing, likely spurred by back to school shopping.
Light blue bar shows upper middle-class households. Source: Moody’s Analytics and Wall Street Journal
 
How retailers can be strategic with both margins and customer satisfaction

From the perspective of retailers, what does this mean for them? How can they be both strategic with margins and customer satisfaction?

For this answer, we look to the changes consumers have made to account for the higher prices.
Source: Morning Consult
 
The top adjustment consumers have made in response to inflation is looking for discounts (79%). While each of the behavior changes noted will have an impact on retailers, there is opportunity for optimization to adjust assortment, pricing, and promotion strategies to support this shift in consumer behavior.

In a stable economic environment, it is already challenging to identify the most profitable pricing and promotion strategies that align with customer expectations. Add in inflation and there are meaningful challenges.

Here are a few options retailers have to manage margins and maintain customer satisfaction:

1. Don’t adjust pricing strategies. Assume that inflation is temporary and take the reduction in margin.
2. Only adjust pricing strategies for nice-to-have categories. Eliminate promotions on necessity categories where inflation will not reduce demand.
3. Make changes to materials, construction, or size of products to maintain existing prices.
4. Adjust pricing and promotion strategies to optimize margins across categories without impacting customer experience.
 
 
Final thoughts

Inflation has impacted both consumers and retailers and is expected to maintain through the end of 2022 and into 2023. Consumers are able to adjust their spending habits to account for inflation and retailers should be evaluating their options as well. For retailers selling non-essential items, inflation has likely decreased demand as consumers are placing a higher emphasis on essential goods and services, creating inventory forecasting challenges. Looking at what consumers have reported as their likely responses, retailers will need to take action to optimize their processes to create flexibility to anticipate and react to the shifts in the market.