As inflation bites and America’s mood darkens, higher-income consumers are cutting back, too

Brickell City Centre mall in Miami, Florida with Apple Store and Chanel. Also, escalators.
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As 60% of Americans live paycheck-to-paycheck, spending reductions are inevitable. A strong economy and wages gains as well as Covid stimulus savings are helping to reduce spending. However, price spikes in key categories such as food, fuel, and shelter have made it more difficult for Americans to watch their finances closely.

CNBC and Momentive have conducted a survey to find that inflation is on the rise. risk of recessionAmericans say that they have. started buying lessInflation will continue to force consumers to buy less from more types of products. However, these points of financial stress are not only for those with lower incomes. According to the survey, Americans with at least $100,000 in income said they have cut back or will soon reduce their spending. This is similar to lower-income consumers.

High-income consumers are key to the economic success. Although it only represents a third of Americans, the high-income consumer demographic is responsible for almost three quarters (or more) of total spending. Mark Zandi is chief economist at Moody’s. He notes that “if the high-income consumer are buying, then we won’t notice a significant impact on raw consumer activities.”

The survey shows that lower-income households are most vulnerable. They are more likely to make unwelcome compromises in order to stretch their income as much as they did a year ago. According to the survey results, 57% of Americans earning less than $50,000 feel more stressed than they did a year ago. This compares with 45% for those making $100,000 and more. However, the 68% of consumers with high incomes who indicated they worry that higher prices could force them into rethinking their financial decisions are significantly less than the 82% who reported this to the survey.

Over half of households with incomes less than $50,000 claim they have cut back on many expenses. For those earning at least $100,000, there are similar cutbacks in dining out and when buying a car.

“People making six-figure incomes are almost as worried about inflation as people making half as much —and they are just as likely to be taking steps to mitigate its effect on their lives,” said Laura Wronski, senior manager of research science at Momentive. She said that inflation is an ongoing problem and people with high incomes will not be immune to the effects of price rises in the second and third orders.

Another recent survey shows a worsening picture.

According to the University of Michigan Survey of Consumers, more respondents cite lower living standards as a result of rising inflation. This is in contrast to the previous 50 year survey. They also mention the worst recessions of the last 50 years (March 1979-April 1981 and May 2008 to October 2008). Notably, the consumer confidence gap between low and high income levels always shrinks at cyclical troughs and is always widest at peak, and the gap is narrowing now, according to survey director Richard Curtin. 

The difference in sentiment between those with the lowest and highest income was 13.2 percentage points. This was lifted in March with sentiment for the highest income groups falling below those in the lowest income brackets in both overall sentiment and future expectation. The expectations of the highest income groups were 18 percentage point higher in January.

Curtin explained that right now there are unique issues that could increase this gap. They include Russia’s possible invasion of Ukraine that could cause more economic damage than expected and the fact that most of the population haven’t experienced inflation above 10% or rates for mortgages below 15% like previous generations.

Curtin stated that even at low rates, they might display behavior associated with past economic hardships. Curtin said, “Precautionary motives are a major part of consumption trends among upper income groups.”

Zandi spoke out about the CNBC survey results, saying that “the American consumer” is in a “dark mood.” Two years have passed since the pandemic, when millions lost their jobs, high unemployment and then high inflation hit. “Fragmented politics” is now a major factor in the collective psyche.

Over 80% of all income levels in the survey predict that the economy will go into recession. The key point is that actual economic spending doesn’t support this prediction.

Zandi stated that consumers continue to spend strongly despite the negative feelings they have about their finances and cuts. Many jobs are available, the unemployment rate has dropped, their debt levels are low and asset prices have risen. Additionally, there’s a lot of saving. Even though some people may be cutting back or spending less on items, their moods have not yet influenced the level of spending that results in a decrease in economic growth. Zandi stated that he believes the American consumer will keep spending regardless of what their mood is as long as there’s a strong job market.

Conference Board latest monthly confidence index reading showed present confidence up (slightly) for the first time this year, but the expectations index lower, with consumers citing rising prices, including gas.

Lynn Franco, The Conference Board’s director of economic indicators, surveys and research, stated that there was still a gap between consumers with lower and higher incomes. This is due to the inflationary environment and the less effect the wealthy will experience from factors such as gas prices. She said the gap does always narrow in a pre-recession period — but its data is not indicating a recession as of now.

Its confidence survey predicts a slower pace of growth in the coming quarters due to higher prices. Americans will spend less on discretionary goods as their income goes towards the necessities, which is what its survey foresees. That will be most acutely felt by the lower-income consumers, but there is broad-based concern about prices rising significantly in the months ahead — 6 out of every 10 consumers surveyed by The Conference Board think the Russia-Ukraine war will cause prices to rise significantly.

Franco explained that Franco’s statement is broad-based. Franco also said that rising interest rates may cause people to be more cautious about putting off big-ticket purchases, such as washing machines and housing. While we expect to see some slowing of consumer spending during the next quarter, it is not expected that this will lead us into recession.

Franco said that Americans who earn $125,000 have a lower overall level of confidence than mid-2021. However, they are still confident “relatively despite the volatility we’ve seen.” … “The indications that we’re getting across income categories speaks more toward a softening consumer spending than an extreme pullback,” she stated.

Like other forecasts, Conference Board’s data are based on the key role of the labor market in supporting confidence as well as balancing negative inflation effects. Americans say that there is “plenty” and this supports the Conference Board’s outlook. 

CNBC CFO Council members mentioned “a tale about two cities” with consumers. Higher income customers are still strong, while consumers of lower income begin to digest the stimulus. It will have a new equilibrium point. Inflation won’t rise as much over the past year but will still be at a higher level. Consumer spending needs to be set against this dynamic. The impact of these changes will last through the calendar year 2022.

The decline of the consumer savings rate, the success of the Fed in slowing the economy without putting it in recession and raising interest rates; as well as greater supply chain stability are key factors CFOs should be monitoring.

With new Covid varieties and the Russian war in Ukraine affecting energy prices, and supply chains still being challenged. If supply chain tensions improve overall, however, inventory replenishment will occur at a pace that could cause retailers to be more cautious about pricing. This is because consumers may slow down their consumption and trade away or trade down in particular categories.

According to the Conference Board, companies pass on inflation costs to their customers relatively rapidly. This trend is expected to persist in the coming months, which will be aided by wage growth. Franco stated that members are confirming the fact that tight labor markets will persist for several more months. Franco also said wage pressure would continue.

Market participants will continue to look out for indicators of sustained consumer strength amid rising prices when earnings are reported. Conagra revealed earlier in the week that its results couldn’t show price increases to its bottom line relative input costs. But CEO Sean Connolly claimed on Thursday that consumers demand “has remained strong in spite of all our pricing actions.”

Conagra plans to increase its price.

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