The Supply Side: Persistent inflation dampens U.S. retail demand

Recession concerns loom among retailers, suppliers and consumers as 2022 ended. Top of mind has been the persistent inflation that continues to squeeze household budgets and retailer margins.

Bank of America CEO Brian Moynihan recently reported that the bank’s credit card growth rate is slowing after more than two years of double-digit growth. He said spending is slowing, and he predicts a recession is coming in early 2023. Moynihan expects three negative quarters of growth in 2023, with a slight uptick coming in the fourth quarter.

Wells Fargo CEO Charlie Schaef said his firm expects a reasonably weak economy in 2023 and forecasts a recession by mid-2023. The bankers recently spoke at a financial conference held in New York.

“We are hopeful the recession will be mild,” Schaef said. “There is certainly more stress on lower-end consumers and with core inflation still running hot at 7.1% in November.”

Only some people are predicting a recession. CNBC’s Jim Cramer recently said the “most likely outcome” is that the U.S. economy will stabilize at lower growth levels before entering a recession.

In the first quarter of 2022, core inflation ranged from 7.5% in January to 8.5% in March. Prices on food and consumables averaged more than 10% more costly than the year-ago period.

Consumers began to shift spending in the first quarter of 2022, leaving retailers like Walmart, Target and Best Buy holding billions of dollars in excess inventory. That change in shopping behavior left retailers working through the inventory gluts in 2022 and still feeling the impact of shrinking gross margins.

By March, retailers began warning of sticker shock at the gas pump and grocery store and its impact on consumer spending patterns through the spring and into the summer months. Medallia surveyed consumers in July 2022 and found that the No. 1 concern among the respondents was the rising prices that continued to escalate. During the second quarter, core inflation averaged 8.3% to 9.1% in June.

Food prices jumped 11% from the year-ago period, and energy costs were 41% higher, led by a 59.9% increase in gasoline prices from the prior year.

While many consumers were forced to make choices, economists with Wells Fargo said in July that consumers were still spending on travel and vacations at the expense of buying apparel, electronics and household items.

Retail sales growth through the summer months was pushed higher by inflation. The CPI reading for July was 8.5%, with food prices rising 13% year over year and energy costs up 32.9%.

Medallia reported that by July, consumers were cutting expenses by switching to cheaper alternatives, ditching subscriptions, dipping into their savings, and using charge cards to take a vacation. Also in July, AAA reported 47.9 million people in the U.S. planned to travel over the Fourth of July holiday weekend. Gasoline prices were at a record high, but that didn’t keep people at home when travel increased nearly 4% over the prior year.

Retailers reported a mixed back-to-school season, with retailers like Target saying higher prices for groceries, housing and other necessities strained consumers. Target and Walmart reported shoppers looking for low prices and promotions and opting to wait on back-to-school shopping until the last minute. Target said shoppers also chose smaller, more private branded items priced at a deeper value.

The National Retail Federation expected families to spend $37 billion on back-to-school items in 2022, which was on par with 2021 estimates. Retail sales for July and August barely outpaced the rate of inflation, according to economists with Bankrate.com.

When retailers reported earnings in August, it was a mixed bag. Walmart and Dollar General said more higher-income households were shopping at their stores, while lower-income families were making fewer purchases. Walmart reported better-than-expected results but continued to see shrinking margins, excess inventory and consumers making smaller basket purchases. Target reported weaker results as its inventory excess reduced net income.

By September, the CPI reading showed core inflation rose 8.2%, with food prices up 13% and energy costs up 19.2%. But consumers saw a bit of relief in gasoline prices which did help consumer confidence improve to a reading of 108, up from 103.6 in August.

In September, Lynn Franco, senior director of economic indicators at The Conference Board, said that a strong job market and declining gas prices supported the improvement in confidence. She said the survey also revealed recession risks were still on consumers’ minds, and their large-ticket purchasing intentions were mixed.

By October, the CPI reading for core inflation was up 7.7%, food costs rose 10.9%, and energy and gasoline prices were up 17% from the prior year. Retail sales, not adjusted for inflation, rose 8.3% for the 12 months that ended in October. Consumers continued to spend more on gasoline and food and reduced purchases of apparel, electronics and other durable goods.

The Federal Reserve reported that consumer credit card balances grew 15% in the third quarter compared to the prior year. It was the highest growth rate in more than 20 years. In November, Eugenio Aleman, the chief economist at Raymond James, said that consumers leaned more heavily on credit to fund experiences versus goods purchases.

“It’s becoming increasingly evident that households’ budgets are being stretched by persistently elevated inflation, forcing many to dip into their savings and use credit to finance outlays,” Aleman noted. “This is by no means sustainable, especially for families at the lower-to-median end of the income spectrum.”

He predicted a pullback in consumer spending under the weight of inflation and elevated interest rates through the holiday season and into 2023. Walmart expected strong holiday sales, while Target forecasted a weaker season with challenges persisting into 2023.

The November CPI numbers reported in mid-December showed core inflation up 7.1%, slightly below the 7.3% consensus forecast. Still, food prices rose 10.6%, and energy costs were up 13% while gasoline prices were 10% higher than a year ago, the lowest they had been in a year.

A survey report from Shopkick conducted in early November found that most consumers remained concerned about inflation and the economic climate. The survey found 61% said they were making holiday sacrifices and spending less on gifting and travel in 2022.

Shopkick found that 55% anticipate economic challenges worsening over the next three months, and 66% said the macroeconomic climate has negatively impacted their household budgets. Looking for ways to save, 74% said they prioritized gifts for children over adults and other families. A majority also said they were seeking out the best deals and were prepared to wait until the last minute to snag the best price.

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.