Are consumers finally pushing back on price?

Consumers are tightening their belts amid persistently high inflation; data show that they continue to spend at a healthy clip. Last month the Bureau of Economic Analysis reported that consumer spending is growing by 1.8% year after adjusting for inflation—not far from its historical average. A report by the Bank of America Institute, a think-tank, finds that consumer payments are growing at double digits, a sign that the American shopper “is still spending,” but there are warnings.

Consumers accumulated more than $2trn in excess savings during the pandemic when the federal government doled out unemployment benefits and stimulus cheques even as households cut back on travel, entertainment, and eating out. Although some of this has been spent, families are still sitting on a $1.4trn cushion, reckons Ian Shepherdson of Pantheon Macroeconomics, a consultancy. The labor market is healthy, too. Unemployment has fallen to 3.5%, its lowest in 50 years. In August, there were 10.1m job openings or 1.7 vacancies for every jobless person.

But another less-appreciated reason why spending has been so steady in the face of soaring inflation is a shift in consumers’ sensitivity to prices, or “price elasticity of demand.” This concept, seldom mentioned outside economics textbooks, has been a hot topic of debate among investors and company executives in the past year (see chart 1). The term has found its way to the earnings calls of consumer-goods giants such as PepsiCo, whose bosses talked of favorable “demand-elasticity trends” while presenting the food-and-drinks giant’s unexpectedly bubbly quarterly results on October 12th.

Figures compiled by IRI suggest that consumers are significantly less price sensitive now than before the pandemic.

• Using scanner data on prices and sales recorded with each purchase of thousands of items across more than 125,000 supermarkets, chemists, dollar stores, and big-box retailers, IRI estimates that price elasticities have fallen for 22 out of 25 product categories since February 2020, and remained flat for the other three.
• IRI reckons that consumers were roughly 20% less price sensitive in the 52-week period ending September 4th than they had been in the year before the pandemic.

Experts offer three possible reasons.

1. As panic-buying led to empty supermarket shelves in the early months of the pandemic, consumers adjusted their shopping routines and tried brands they weren’t used to, says Brett Gordon, a marketing professor at Northwestern University.
2. People became more comfortable splurging on pricier food and household items with more time at home.
3. According to government statistics, consumers cut the time they spent shopping—by roughly 9% between 2019 and 2021. The way they use that has changed, too. “A lot of people maybe spent more time shopping for things to outfit their homes, but less time worrying about everyday consumer products,” says Alexander MacKay of Harvard Business School.

There are some signs that consumers are starting to pull back.

Walmart says that its shoppers are switching from pricey deli meats to hot dogs and from gallons (3.8 liters) of milk to half-gallons.

Best Buy, an electronics retailer, says its customers are increasingly opting for private-label TVs over name-brand sets.

These shifts in consumer behavior are most pronounced among lower-income households. Discount department stores say that outlets in higher-income areas are growing faster for the first time in years than those in lower-income ones.

“Middle-income and high-income consumers are continuing to spend,” explains Krishnakumar Davey of IRI, but “low-income stores and low-income consumers are pulling back a little bit.”

Some brands thought their price increases would go unnoticed, but preliminary data shows consumers are switching to less expensive private-label products. Grocers are making the most of private label growth, and some private label suppliers are seeing a massive demand for new products.

Will it continue? My guess is yes. Data indicates consumers are getting deeper into debt and the recession fear has a lot of people scared to spend. Some economists are predicting a housing market crash that could halve current prices. If that happens, buyers will lose billions in equity.