Inflation Effects Set to Kneecap Retailers’ 2022 Holiday Outlook, and Beyond

What a difference a year makes.

Consulting giant McKinsey & Co. released the results of a consumer survey last fall that bore this bubbly headline: “Shoppers are feeling spendy and social.” McKinsey said half of those reporting annual earnings of at least $100,000 were, “excited or eager about the holidays.” It turned out to be a good call. Despite the pandemic and its many complications, the US Census Bureau’s final tally showed annual retail sales grew in 2021 by a whopping 18 percent over 2020.

The headline this year? How about, “Shoppers are tapped out, exhausted, and gloomy?” I am not sure that statement is accurate either.

The principal villain is inflation, but the problem runs far deeper than the price of gas or groceries. Interest rates are spiking. That means the cost of credit card debt is surging and, as the Federal Reserve recently promised, is expected to continue to rise as the central bank acts to keep inflation from worsening.

A year ago, consumers had a good reason to feel “spendy.” Among other factors, many had used some of the flood of government stimulus funds released during the year to whittle down debt. At the same time, real estate prices were beginning their wild ride. The median sales price of houses sold in the US rose by more than a third in just 12 months. Consumers were flush with cash, credit, and home equity.

A year later, credit card debt has ballooned, posting the largest year-over-year percentage increase in more than two decades. Revolving credit increased in July alone at an annual rate of 11.6 percent.

So, consumers have been spending money they don’t have and now it’s costing them a lot more. A year ago, the average adjustable-rate credit card charged about 15%. Today the average adjustable rate for all new card offers has breached 21%, with some bank cards flirting with 25%. Those rates are guaranteed to continue rising as the Federal Reserve ratchets up the prime rate on which credit card rates are based.

Meanwhile, rising mortgage rates are smothering the real estate bonanza. Home prices are being marked down, home equity is shrinking, and those who traded up, invested in real estate, or bought second homes are discovering what it means to be land-poor.

Perhaps the most telling statistic about the state of the consumer is the Fed’s Personal Savings Rate tracker which calculates personal savings as a percentage of disposable personal income. That measure peaked in May 2020 as federal stimulus payments flooded the economy with cash.

A year ago, the savings rate was 10.5%, the highest in three decades. A year later, in the most recent report for July, it had plunged to 5%, the lowest rate since the Great Meltdown/mortgage crisis of 2008.

What does this data all mean to the state of the consumer and future spending?

First, cars and homes are becoming unaffordable for many and therefore that segment of the economy will continue to slowdown as intended by the Fed’s interest rate adjustments. If the Fed can get inflation under control, specifically food and gas prices, then there might be light at the end of the tunnel. If not and consumers have less cash to spend, they will likely cut spending or borrow.

Which leads us to the final factor of consumer debt that must be considered. If employment numbers remain strong, and people can continue to pay their credit card payments AND keep a rationale percentage of debt, we may all be in for a decent landing.

The concern is there are a lot of “ifs” in those statements.

Best for both business and consumers to continue to keep a close eye on all the metrics of what is currently going on and what has happened in the economy, but just as important to try to anticipate what may be next.