Inflation is Finally Catching Up to Consumers

The shift to lower-priced retail goods has been primarily focused on food, so far.

Budget-strained shoppers are starting to weigh their choices

By Andy Kriege, YSN

Major retailers are bracing for a shift in spending as inflation rises along with interest rates as the stock market flounders.

Merchants are bringing back more bargains, cheaper store brands and rewards programs for shoppers who want to save where they can, as consumers are finally starting to feel the pinch of inflation.

At Walmart and Target, customers are now choosing more store-branded items. These private-label products are produced exclusively for their own shelves and are usually offered at lower prices for shoppers and deliver higher profit margins to the retailers.

So far, the shift to lower-priced retail goods has been primarily focused on food items after years of market share gains by the big-name national brands, although Google reports that queries including the modifier “cheap” grew exponentially last month in searches for all manner of affordable essentials.

In addition to choosing cheaper brands, consumers are also purchasing smaller quantities. Walmart noted in a recent earnings call that they are selling more half-gallon containers of milk than ever before. People have also begun filling their gas tanks only halfway.

Product choices and portion sizes reflect how the rise of inflation is upending daily life for many Americans. With the cost of just about everything on the rise, more and more people are being forced to make increasingly difficult choices between what they need vs. what they want.

According to a new report from market research firm The NPD Group, more than eight in 10 consumers are planning to rethink or even reduce their product spending in the next three to six months.

With gasoline leading the inflation parade, we are just beginning to see demand destruction cut into sales at the pump. The price of gasoline has set all-time records almost daily over the past few weeks. With the national average nearing $5 a gallon, consumers are just now beginning to curtail their driving habits. Gasoline usage has decreased for the first time since the beginning of the pandemic, with March demand down almost 3% year-over-year according to the American Automobile Association (AAA). AAA also reported that surging gas prices have caused a record number of motorists to be stranded on the side of the road. AAA fielded over 50,000 out-of-gas calls in April alone, a 32% increase from a year ago.

When demand destruction occurs, consumers begin switching to more desirable alternatives or simply stop buying because they can no longer afford the higher prices.

At what point will runaway inflation begin to create demand destruction across a wider swath of consumer goods?  No one knows for sure. For now, it depends on the product or service you are selling. Experiential-related sales, such as travel bookings and concert tickets, remain high, although home goods and other physical items are showing signs of stress. Target, for one, reported softened first-quarter demand for lawn furniture, TVs and kitchen appliances, according to business news site Quartz.

Related: How to Turn Inflation in Your Favor

Another harbinger of a possible pullback is falling consumer confidence, which dropped to the lowest level in more than 10 years, as measured by the University of Michigan. According to the school’s latest monthly survey, its proprietary consumer sentiment index fell to 58.4, well below the 43-year average of 85.9. There have been only nine other months during that span in which the index was lower.

That said, some shoppers, especially those from wealthy households, still have plenty of spending power, according to data released last week by the U.S. Commerce Department. Plus, overall retail sales remain relatively strong.

Still, consumers will most assuredly change their shopping habits if prices continue to rise. Supply and demand are the foundations of a free-market economy and these fundamental mechanisms have been out of whack since the onset of the pandemic. How much merchandise to carry and what price points to sell it at will certainly be considerations when holding inventory in your warehouse.

See also: To Promote or Not to Promote

Inflation is by far the No. 1 issue straining some consumers, especially low-income households. Purchasing decisions, particularly around big-ticket items, will certainly influence what else consumers will, or can afford, to buy.

 Andy Kriege is General Manager of Communications for AVB BrandSource, the nation’s leading merchandising and marketing co-op for independent appliance, home furnishings and consumer tech dealers and the parent company of YSN.