Breaking Down Inflation’s Impact on Consumer Behavior
The Labor Department reported a continued rise in the Consumer Price Index increased by 0.8 percent in February alone — 7.9 percent year-over-year — and consumers have taken notice, showing signs of fretting over the prices of “common, everyday goods,” as previously reported by WWD.
The state of consumer behaviors has shown to be incredibly susceptible to change throughout the pandemic, so what does this growing inflation mean for how people will shop in the months ahead? Two recent reports shed light on shopper sentiment, and the picture isn’t bright.
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According to the EY U.S. Future Consumer Index, half of U.S. consumers say that rising costs of goods and services are making it hard to afford things. When asked about what the most important purchase criteria are right now, 58 percent of respondents cited price while 64 percent said price will be the most important purchase criteria in the next three years.
And in a separate report from Affirm, the payment solutions network, which surveyed 1,740 consumers to understand how inflation is affecting their spending habits, 66 percent of U.S. consumers are concerned that rising costs will prevent them from paying for the things and experiences they had planned for the year. For Millennials and Generation Z, the number was 73 percent.
Looking at current perceptions, the EY survey found that the only factor that outweighed price as an important criterion when making a purchase decision was availability at just 2 percent higher than price — a lingering impact of the pandemic as well as supply chain issues.
“Consumers are telling us that with essential items, they’re still willing to pay that the higher price,” said Jeff Orschell, EY Americas consumer retail leader. “They know that inflation has caused those prices to go up, they know that it’s likely to go up some more, but they’re still focused on [availability]. Things like gas, fresh food or packaged food are ones that have been insulated from the inflation from what we’re hearing.”
When it comes to price sensitivity, EY’s consumer research found that gas, fresh food and packaged food are less susceptible to experience a change in how consumers purchase compared to nice-to-have categories. In fact, Orschell said that while consumers are bracing themselves for higher prices, they will continue to pay them. Sixty-five percent of consumers say they haven’t changed the way they are consuming gasoline and 59 percent said fresh food is still important.
“Those nonessentials are the ones that are taking the head right now,” Orschell said. “Apparel is a big one — 38 percent of consumers say they’re purchasing less apparel and 29 percent say they’re purchasing fewer beauty products. A third of consumers said they are also purchasing fewer consumer electronics.”
A standout from the nice-to-have category was alcohol. Historically thought to be safe from economic hardship, 27 percent of U.S. consumers said they are purchasing fewer alcoholic beverages as prices continue to rise.
An area that consumers are struggling with seems to be in planning to pay for experiences where they are taking note of rising prices (in part due to rising gas prices impacting more than the immediate need to fill a car’s tank) in conflict with the desire to travel and plan activities after spending the majority of the last two years in pandemic lockdown.
“In the heart of the pandemic, when we were in the lockdowns and before the vaccine came out, experiences were a small part or the smallest part of consumer spend,” Orschell said. “Now you look at what we got back in February, the affordability-first mind-set was the first bucket at 25 percent of the population and right behind it experiences at 24 percent. People are at the point now where they’re saying, ‘I’ve had it, I’m done with the pandemic and I want to get back out and experience life, eat at restaurants, go on vacations,’ and so that’s bounced back up there, but affordability is still the top bucket.”
Following closely behind an affordability mind-set and experience mind-set in EY’s findings was a planet-first mind-set at 21 percent — a rise for the U.S.
With an increase in priority for sustainability in mind, despite inflation costs, 40 percent of consumers said they will only buy from brands that align with values, even if that means switching from brands they know and trust. This finding was true for 53 percent of Millennials, 46 percent of Gen Z and 26 percent of Baby Boomers.
For consumer-facing companies, Orschell said the best course of action is to take near- to medium-term actions to mitigate the impact of inflation by exercising pricing power, protecting margins and investing in productivity gains.
“For retailers, I think they need to be aware of the fact that this is having a significant impact on how consumers are deciding what to buy, and where to buy it,” Orschell said. “The things that retailers need to think about is if they’ve got a store brand, this is a great time to start promoting their store brands – we’ve seen an uptick in the desire of consumers to be willing to purchase store brands. I’ll just say it’s just continuing to tighten up the shop, looking for ways that they can be more efficient, looking for ways they can reduce inventory levels, looking for ways that they can assure that their partners are meeting their obligations, and if they’re not, they’re holding them accountable.”
Continuing to tighten up and ship definitely applies to apparel, he said. This includes making sure that physical stores are being used effectively as channels as brands become more cost-effective.
Lastly, Orschell said companies need to continue to look at supply chains. “We’ve seen that the supply chain that we built over the last several decades is just not resilient and it’s proven that time and time again in the last 24 months. It’s going to take a while to fix that, but the long lead times the huge order quantities, trying to figure out what you and I want to buy 12 to 18 months from now, everybody has looked at that thinking about how they can shorten that supply chain. And that’s as a global sense, it’s not just a U.S. thing.”
Overall, when looking at consumer sentiment in the U.S., Orschell said it could be described as “cautious.”
“Everybody is excited by the fact that we’re getting our freedoms back and it looks like we’re getting to the point where, hopefully, COVID-19 will be in a rearview mirror,” Orschell said. There’s some optimism there but then when it comes to affordability, they’re all there. The data shows that they’re struggling so that’s leading to that cautiousness. Will that turn into passive pessimism? I don’t know. But I think it’s one thing we have to watch and if we have more inflation reports that we’ve had recently I would predict it’s going to degrade further.”
In the Affirm report, Silvija Martincevic, chief commercial officer at Affirm, said whether consumers “are shopping around for the best price on a new kitchen appliance, or taking what’s left to save for a rainy day, one thing is unmistakable: Americans are feeling the impact of inflation as prices continue to increase.”
In response to the mounting financial stress, 53 percent of Millennials and Gen Z said they plan to spend less and 21 percent say they will make investments using tax refunds this year. This is in contrast to 81 percent of Gen X and Baby Boomers who told Affirm they plan to spend the same or more during inflation. Only 14 percent said they will invest their tax refunds.
With saving money in mind, consumers said they will make an effort to stay home. For 38 percent this means prioritizing purchases for the home as a top priority. More than half (53 percent) of consumers said they will deprioritize going out to restaurants, while 47 percent said they will deprioritize entertainment and 34 percent said they will deprioritize beauty as a spending category.
At the same time, when asked about flexible payment options to budget, 23 percent of consumers said they are likely to use a buy now, pay later option like Affirm over the next month as a result of rising prices. At 41 percent, Millennials and Gen Z were almost twice as likely as consumers overall to choose to use BNPL due to inflation.
Notably, Affirm’s recent spending report also revealed more than half of consumers are interested in using pay-over-time solutions this year. “At a time when many things are out of our control, Affirm’s products are designed to bring some of that control back, by enabling consumers to pay overtime responsibly and thereby increase their purchasing power,” Martincevic said. “In doing so, we help consumers get the items that they need, in a way that fits their budget.”
FOR MORE WWD BUSINESS NEWS:
Adobe Report: E-comm Holding Up in Face of Inflation
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