If Inflation Is So Scary, Why Are Consumers Still Spending?

Just as the pandemic seemed to be receding as an imminent threat to us all, there comes a new boogeyman — inflation. That was the headline finding in a Pew Research survey conducted late last month: 93% of respondents rated inflation a “very big” or “moderately big” problem. And it’s changing their behavior.

Of 1,000 US adults polled in a recent survey by First Insight, 97% reported that high inflation is now a factor in their financial planning. Three out of four said their spending is now focused more on essentials and healthcare.

Far and away, inflation is what Americans are most worried about, and what keeps retailers up at night.

Yes, prices are up for fuel, food, housing, and autos, but the media has also been relentlessly beating the drums of doom. Worst inflation in generations! Only going to get worse!

Perhaps. But for now, I’ve been wondering why consumers are still shopping, filling parking lots, and booking vacations.

We may all be nervous, but Bank of America reported that April debit and credit card spending across all income brackets was 13% higher than a year ago. More significantly, the bank said card spending per household was 24% higher than three years earlier, in pre-pandemic 2019.

Another indicator the industry watches is visit counts at malls and shopping centers. Placer.ai, which crunches data on foot traffic, reports that indoor malls, open-air lifestyle centers, and outlet malls have been rebounding. The company recorded the biggest increase at outlet malls, where April visits surged 31.6% over March. Placer said visits to indoor malls were up 17.4% from March, and almost even with 2019.

What’s going on here?

The statistics tell us the cost of housing is up a lot, about a third in two years, according to Census Bureau statistics on sales. But for five of the last 10 years, home prices were recovering from a massive deflation in the wake of the 2008 financial collapse. Some experts claim that the real cost of housing hasn’t changed much in 40 years.

In a piece, he recently posted on Supermoney.com, a financial services shopping platform, managing editor Andrew Latham argues that housing prices may be in bubble territory in California and the Northeast, but, “On the national level, 53% of Americans have the necessary income to qualify for a median-priced home in their state.”

Gasoline is expensive, recently hitting a record average of about $4.50 a gallon. But people who believe gasoline prices have never been so high, “are suffering from what economists call ‘the money illusion,’” writes Rex Nutting, a columnist at Marketwatch.com.

“Our brains are fooling us into thinking we’ve never had it so bad.” When you adjust for more fuel-efficient cars, inflation, and other factors, “The cost of driving a mile in your gas-powered vehicle is now lower than it was for most of the past century.”

Meanwhile, real median household income in the US had been rising for five years until the Covid-19 shutdown hit in 2020. From 2015 through 2019, real median household income grew by 20%, up by $4,400 in 2019 alone.

What’s going on with inflation would appear to be more of a case of reflation.

We enjoyed a long stretch of ever-cheaper goods, ever-cheaper technology, greater energy efficiency, and rock-bottom interest rates. Now we’re catching up. Unfortunately, most company managers and directors are out of touch with consumers’ wants and more importantly what they are willing to pay. In a past First Insight study, the data showed that there was a huge disconnect between retail execs and their customers on pricing. Amazing that with cheap technology and an easy way to get the data from customers, many execs choose not to engage to understand.

Yet, despite their fears, it turns out that consumers are still shopping, albeit cautiously, because they can.