The Great Uncertainty: US consumer confidence and behavior during inflationary times

Consumer confidence has plummeted to a new low. Although the pandemic created turmoil in global markets for more than two years, people had, until this summer, been remarkably consistent about their feelings on the economy. Since March 2020, we’ve asked consumers about their confidence in the US economy multiple times, and each time well over 80 percent of respondents expressed a view that the economy will either rebound and continue to grow in only two or three months, or that the economy will be impacted for six to 12 months, with recovery taking a bit longer.

But now that inflation has accelerated to its highest rate in four decades, 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. That’s twice as many feeling glum now than throughout the entire pandemic. We’re not the only ones to report sinking sentiment. The University of Michigan, which has been tracking consumer sentiment since 1952, also reported record low sentiment this summer.

Inflation woes are top of mind. With the consumer price index rising 9.1 percent year on year in June 2022, it’s no wonder everyone’s fretting about what they see at the cash register. Similar to the sentiment shift we saw in Europe earlier this summer, rising prices are people’s biggest worry. When asked about their top three concerns right now, nearly two-thirds of our survey respondents say inflation tops their list, far outweighing other economic, political, and personal concerns, including COVID-19.

Not everyone in the United States is equally concerned about inflation, though. There’s a striking difference in outlook between generations. Among baby boomers, 75 percent say rising prices are their top worry, while 71 percent of Gen Xers say the same. But the breadth of concern drops with age: 55 percent of millennials and only 44 percent of Gen Zers say inflation is their biggest source of stress. For Gen Zers, personal and political topics rise to the top of their concerns, alongside inflation.

Consumers are changing how they manage their finances. In response to rising inflation, 66 percent of consumers are taking action. Within this group, 44 percent are either dipping into their savings or reducing the amount they’re setting aside. Eighteen percent are charging more to their credit cards, and another 18 percent aren’t paying their bills in full. Thirteen percent are taking on extra work for more income.

Interestingly, although younger consumers are less concerned about inflation, they are more active in managing their balance sheets, with more than three-quarters of Gen Zers and millennials making adjustments. That drops to two-thirds of Gen Xers and 55 percent of boomers doing the same.

Most US consumers have good nest eggs. Even with the volatility of the markets, most US consumers have a good amount of savings to dip into. Over the course of the pandemic, as stimulus checks arrived in the mail and people pulled back on spending on expensive experiences like travel, bank accounts grew larger, with wealthier households saving twice as much as they did prepandemic. For middle-income families, the growth has been more modest. Low-income households are just now starting to see their bank accounts shrink, with cash holdings reduced by 0.5 percent between the fourth quarter of 2021 and first quarter of 2022.

Consumers are changing their shopping habits—but not all in the same way. With prices rising dramatically so quickly, people are changing the way they spend. Seventy-four percent of our survey respondents say they’re trading down, with half of them saying their money doesn’t go as far as it did before, 43 percent making adjustments to save more, and 29 percent saying that they can’t pay their bills.

Most of those trading down either adjusted the quantity or pack size of their purchases (60 percent), which is the primary method of trading down for necessities, or decided to postpone a purchase (44 percent), typically for nonessential items. Across categories—but particularly in footwear, groceries, home improvement, and apparel—more lower-income consumers say they delayed purchases than those with higher incomes. People are also trading down by going to lower-priced stores, switching to brands that cost less, or adopting a buy now, pay later approach.

Perceptions of inflation don’t always match reality. With the dollar-per-gallon amount dominating headlines and airwaves, it’s no great surprise that consumers think gas prices have skyrocketed—because they have. The rising cost of groceries and air travel are also part of this summer’s inflation chatter.

But when it comes to other categories, there’s a misalignment of consumer perception to reality. Take, for example, consumer electronics, skin care and makeup, and toys and baby supplies. Around 30 percent of our respondents think that there’s been a significant markup in prices in at least one of these categories, but the inflation for such products has been less than 2 percent. In other categories, the inverse is true. For example, only a quarter of respondents think prices have gone up a lot for home and garden supplies, which is a category whose prices have gone up more than 11 percent.

Spend growth is slowing down—but still growing—in some categories and channels more than others. As consumers trade down and some begin to dip into their savings, their spending is starting to decelerate in some areas. Yet there’s still growth, with overall credit and debit spending up 5 percent year over year (real growth, adjusted for inflation). In particular, real credit and debit spending is growing (up 9 percent in the past year) with high-income consumer. At 2 percent growth, middle-income households are spending slightly more than last year, while lower income households are spending slightly less than last year by 2 percent.

While spending has slowed for some categories that saw increased activity during the pandemic, such as home and electronics, other categories are still experiencing double-digit growth. Real credit and debit sales of cosmetics have gone up 16 percent, and pet supplies sales have grown 11 percent. Categories that showed recovery in 2021, such as retail apparel and restaurants, have been holding fairly steady this year.

As for retail channels, some value-focused retailers that offer essentials are also seeing strong growth. Wholesale-club and discount-store credit and debit sales growth have gone up 24 percent and 11 percent, respectively. And at 12 percent growth, grocery stores have seen their strongest month since before the pandemic.

Consumers expect to increase their spending on necessities and tighten their belts when it comes to nonessentials. Across the board, consumers of all ages and income levels think they will spend more on essential goods like groceries and gas. When asked about their spending intentions for the next two weeks, more consumers expected to spend more for essentials (22 percent positive net intent) and less on discretionary goods (21 percent negative net intent). However, consumers’ intention to spend is still much higher now than it was during the first few months of the pandemic (31 percent positive net intent).

However, optimism varies across income levels and generations. With the notable exception of Gen Z, higher-income consumers of all ages say that their spending will continue to grow whether or not they’re buying necessities or discretionary goods. Millennials are especially optimistic—with high-income millennials indicating they plan to spend across almost every category, essential and discretionary. On the other hand, middle- and lower-income populations of all age ranges expect to forgo items and experiences that are not needed.