Consumers Say No To Soaring Costs

Shifting Dynamic

Even amid high inflation and rising interest rates, consumers have continued spending. In response, many companies have raised their prices — and profit margins. Neither of these behaviors have helped bring down inflation, making it more difficult for the Federal Reserve to rein in prices.

For companies raising prices, the perception appears to have been that shoppers are going to shop regardless of increased costs. But now, this dynamic could shift.

Empty Coffers

The savings consumers amassed during stay-at-home orders and stimulus checks have mostly dried up. Signs of strain are becoming more evident lately. Excess savings — which topped out at $2 trillion in 2021 — have been falling, along with personal savings rates. Meanwhile, household debt reached a record $16.9 trillion at the end of 2022.

Many Americans’ balance sheets are not healthy. With prices higher on everything from groceries to utilities, consumers are increasingly reliant on debt to cover their expenses. This practice can cause an expense spiral, given high interest rates paid on borrowed funds. (If you have fallen into high interest credit card debt, a personal loan with a lower rate could help you save money over the life of the loan.)

Delinquencies are also on the rise, particularly in the younger population. These trends may cause the buying frenzy to fizzle.

On Second Thought…

As consumers rethink their spending patterns, companies may be compelled to reconsider pricing strategies. Otherwise, their customer base could erode as shoppers shift to lower-cost brands.

Many Americans have seen their incomes rise in the last couple of years. But these raises have often lagged inflation, leaving consumers with less buying power. In turn, some have been forced to make major changes in buying habits or have gone into unexpected credit card debt.

Some companies are taking notice. Kraft Heinz (KHC) pumped up their prices by over 15% in 2022, but reportedly plans to hold prices steady in 2023. Further price hikes could backfire, harming the bottom line.

For consumers, this serves as a reminder that buying habits matter — not just to your budget, but to how companies react. By adjusting spending, you can both bring your savings back up and, quite possibly, help bring prices across the board back down to earth.

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