The Supply Side: Consumer resiliency at risk amid inflationary pressures

American consumers continue to spend despite federal stimulus programs ending last year. According to the U.S. Census Bureau, retail sales in January were up 7.5% from a year ago. Holiday sales were up a record 14.1% last year, pushing well beyond expectations.

Part of the sales gain was from rising prices across the board on everything from breakfast cereal to steak and lumber. Economists warn that the retail sales data wasn’t adjusted to account for inflation, and that could artificially boost sales figures for months to come.

With prices rising faster than expected in January, the Federal Open Market Committee has become more hawkish on interest rate hikes by March. James Bullard, president of the St. Louis Federal Reserve, said he thinks the first interest rate hike will be more aggressive than previously planned.

Randall Waldron, an economics professor at John Brown University, said consumers and businesses have handled the inflationary pressures thus far. That said, Waldron expects inflation to worsen before it improves, which is likely to take a toll on consumer purchasing power through the first half of this year.

While savings rates grew amid the pandemic, a recent survey by Bankrate.com found just 44% of consumers have enough savings to cover an unplanned expense of $1,000. While 20% would put the payment on a credit card, 15% said they would cut costs elsewhere to cover the cost. One in 10 would ask friends and family for help, and 4% would take out a personal loan.

Greg McBride, CFA, a chief financial analyst for Bankrate, said the survey found the reliance on borrowing remains high, with a majority of households needing help to cover a $1,000 expense.

Rising household debts are also a concern. Economists at Wells Fargo Securities reported that household debt balances increased $333 million in the fourth quarter, marking the most significant quarterly uptick in almost 15 years. Mortgage and credit cards balances also saw the most significant increases in the fourth quarter since before the pandemic. Consumer debt surged in the fourth quarter to nearly $15.6 trillion.

The chief economist at Wells Fargo Securities, Jay Bryson expects some inflationary prices to slow in the coming months as more spending shifts away from goods toward services.

“As the most immediate price distortions brought on by the pandemic and initial policy response unwind, wage pressures continue to build and point to a more constant source of inflation. The upshot is that inflation is likely to remain uncomfortably high for consumers, businesses and the Fed alike,” Bryson said.

Consumer sentiment for February from the University of Michigan Survey indicates consumer concern regarding inflation rose to its highest level since 2008 and weighed on consumers’ views of their household finances.

Wells Fargo economists said the highest inflation in more than 40 years challenges consumers’ disposable income, which is likely to make them more cost-conscious. Wells Fargo also reported that consumer credit card debt rose by $52 billion in the fourth quarter, the most significant quarterly increase in the 22-year history of the reported data. Revolving credit card usage rose just $2.1 billion in December, the smallest gain since April 2021 as consumers pulled back spending at year-end.

“Inflationary headwinds to consumer activity are likely to pick up throughout 2022, as evidenced by the recent deterioration in consumer sentiment,” Bryson said.

The University of Michigan’s preliminary consumer sentiment index for the first half of February fell to 61.7, its lowest level since October 2011. The decline in sentiment was entirely among households with incomes of $100,000 or more. The survey found that nearly half of consumers expect disposable income to decline in the year, given that prices are rising faster than wages. The February sentiment reading also included fewer households citing savings wealth, which could result from falling stock prices this year and income erosion from rising prices of goods and services.

“The recent declines have been driven by weakening personal financial prospects, largely due to rising inflation, less confidence in the government’s economic policies, and the least favorable long-term economic outlook in a decade,” said Richard Curtin, chief economist at the University of Michigan.

Curtain said the declines in sentiment signal the onset of a sustained downturn in consumer spending. However, the depth of the slump is subject to several caveats not present in prior downturns, including the impact of unspent stimulus funds and the pandemic’s disruption of spending and work situations. He said households did amass substantial savings from the stimulus funds and limited consumption choices amid the pandemic. But rising interest rates and inflationary prices will erode the savings.

The National Retail Federation (NRF) said there are challenges in the near term with inflationary pressures, labor shortages, COVID-19 impacts and uncertainty related to international tensions in Russia and China.

Through January, retail spending has held up, indicating consumers are weathering the inflationary pressures in the short term, according to NRF CEO Matthew Shay. The trade group is optimistic about consumer spending as economic forces are expected to moderate later this year.

That sentiment contrasts with consumer data Deloitte reported in January. Deloitte found that consumers felt more cautious on spending, not because of Omicron, but because of rising prices. The share of consumers that also expressed concerns over savings intensified compared to last fall. Deloitte reports that 68% of survey respondents said they faced rising prices of groceries in January, and their intentions to buy new vehicles weakened to 16%.

Another report from Resonate found that 34% of consumers have less discretionary income, and nearly four out of five cite best prices as their No. 1 retailer selection trait. While they have a long list of wish list items, they need to keep it budget-friendly.

Editor’s note: The Supply Side section of Talk Business & Politics focuses on the companies, organizations, issues and individuals engaged in providing products and services to retailers. The Supply Side is managed by Talk Business & Politics and sponsored by Propak Logistics.