As inflation bites, high-income consumers also cut spending

Miami, Florida, Brickell City Center mall with Apple Store, Chanel and escalators.

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With up to 60% of US consumers living paycheck to paycheck, it’s no surprise to see the spending cuts have begun. Even with a strong job market and wage gains, as well as Covid stimulus economies, price spikes in basic spending categories including food, gas and housing are prompting more Americans to be very careful with their wallets.

A new survey from CNBC and Momentive reveals growing concerns about inflation and the risk of recession, and Americans say they not only have started buying less, but will buy less in more categories if inflation persists. But these financial stress points are not limited to low-income consumers. The survey finds that Americans with incomes of at least $100,000 say they have cut spending, or may soon do so, in numbers that are not far off from the decisions made by the groups at low income.

The high-income consumer population is the key to the economy. While it represents only a third of consumers, it is responsible for up to three quarters of expenditure. As Mark Zandi, chief economist at Moody’s notes, “if high-income consumers are buying, we won’t see a big impact on gross consumer activity.”

Low-income households are the most at risk, and they are the ones most likely to make unwelcome compromises to make their money grow as far back as just a few months ago, according to the survey results. They also clearly experience more financial anxiety, according to the survey, with 57% of Americans with incomes below $50,000 saying they are more stressed than a year ago, compared to 45% of those with incomes of $100,000. $ or more. The 68% of high-income consumers who said they fear higher prices will force them to rethink their financial decisions are significantly lower than the 82% of Americans with incomes of $50,000 or less who said so in the survey, but it is still a majority.

More than half of people with household incomes below $50,000 report having already reduced their multiple expenses due to prices, and for those with incomes of at least $100,000, reduction levels are already similar when it comes to dining out, taking vacations and buying a car.

“People earning six-figure incomes are almost as concerned about inflation as people earning half that — and they’re just as likely to take steps to mitigate its effects on their lives,” Laura Wronski said. , Senior Director of Scientific Research at Momentive. . “Inflation is a problem that gets worse over time, and even high-income people won’t be immune to the second- and third-order effects of price increases,” she said.

Other recent consumer survey data paint a weakening picture.

The University of Michigan Consumer Survey finds that more consumers cite declining living standards due to rising inflation than at any other time in the survey’s history, exception of the two worst recessions of the last 50 years: from March 1979 to April 1981 and from May to October. 2008. Notably, the consumer confidence gap between low and high income levels always narrows at cyclical lows and is always widest at the top, and the gap is narrowing now, according to survey director Richard curtin.

In January, the percentage point gap between the lowest income group and the highest income group in the survey’s sentiment index was 13.2 points. This was erased in March, with sentiment in the highest income group actually dipping below the lowest income bracket in overall sentiment and future expectations. In January, the expectations of high-income groups, in particular, were 18 percentage points higher.

Right now, there’s a unique set of issues that could compound that narrowing gap, Curtin said, including the potential for Russia’s invasion of Ukraine to cause more damage to the economy. world than expected and the fact that the majority of the population has not experienced inflation of 10% or more, or mortgage rates of 15%, like previous generations.

“Even at lower rates, they may display behaviors associated with more extreme economic conditions in the past,” Curtin said. “Precautionary motives play an important role in the consumption patterns of high-income groups,” he added.

“The American consumer is in a somber mood,” Zandi said of the CNBC survey data. More than two years since the pandemic hit, first with millions of jobs lost and high unemployment, and now high inflation, and “fractured politics also weighing heavily on the collective psyche”.

All income groups in the survey are equally likely to say the economy will go into recession this year, at more than 80%. But there is a key caveat: the economy’s actual spending actions do not yet indicate that this prediction will come true.

Despite pessimistic feelings about their financial situation and budget cuts, Zandi pointed out that consumers are still spending heavily. There are now plenty of jobs, the unemployment rate is low, debt loads are light, asset prices are high, and there is plenty of excess savings. Even though people are cutting spending, spending less on certain items, the mood has yet to take control of the motivation for spending to a degree that equates to more than a slowdown in economic growth. “I suspect the American consumer will continue to spend, regardless of their mood, as long as the labor market remains strong,” Zandi said.

The latest monthly reading of the Conference Board’s Confidence Index showed current confidence rising (slightly) for the first time this year, but the index of expectations falling, with consumers citing rising prices, including l ‘essence.

Lynn Franco, director of economic indicators and surveys at the Conference Board, said there was still a gap in her confidence data between low-income and high-income consumers and that was largely due to the inflationary environment, and less impact the wealthy will feel. from factors such as gasoline prices. She said the gap is always narrowing in a pre-recession period – but her data does not indicate a recession at this time.

What its confidence survey predicts is slower growth in the coming quarters as prices rise and more Americans spend less on discretionary items as more of their money is used to cover basic needs. It will be felt hardest by low-income consumers, but the significant price increase in the coming months is causing widespread concern – 6 in 10 consumers surveyed by the Conference Board believe the Russian-Ukrainian war will lead to lower prices. price. increase significantly.

“It’s very widespread and that, coupled with rising interest rates, can make people more hesitant to put off big purchases like housing, cars and washing machines,” Franco said. “We will see a slight slowdown in consumer spending over the next few quarters, but we don’t think that will lead us into recession.”

The overall confidence level of Americans with an income of $125,000 in his survey dipped again from mid-2021, but Franco described them as still “relatively confident despite all the volatility we’ve seen. …Indications that we’re getting across income groups talking more toward an easing in consumer spending rather than a severe pullback,” she said.

The Conference Board data, similar to other outlooks, is underpinned by the labor market’s key role in supporting confidence and balancing the negative influence of inflation, with Americans saying jobs are “abundant” at an all-time high.

More from CNBC | Momentary consumer survey

Members of the CNBC CFO Council cited “a two-city tale” among consumers, with high-income consumers continuing to be strong while lower-income consumers are starting to chew the stimulus. There will be a new equilibrium point, and inflation will not rise as it has over the past year, but it will remain at a higher level, and consumer spending must be faced with this dynamic will unfold throughout calendar year 2022. , and should be felt more harshly in the second half.

Key factors CFOs are watching include falling consumer savings rates; how well the Fed is using its tools to slow the economy without pushing it into recession, including raising rates to cool consumption and investment; and greater supply chain stability.

The supply chain remains in flux with new variants of Covid, as well as Russia’s war on Ukraine hitting energy and food prices. But if supply chain pressures ease overall, inventories will be replenished at a pace that could lead to more price reluctance from retailers as consumers also begin to slow down their spending habits, to reduce or move away from certain categories of purchases.

The Conference Board’s latest survey of CEOs showed that businesses are passing the costs of inflation on to consumers relatively quickly, and this trend is expected to continue in the coming months, with wage gains a contributing factor. “What we are seeing and hearing from members is that these tight labor market conditions are going to continue for several months, so we will continue to see wage pressures,” Franco said.

As earnings roll in, the market will be looking for signs of sustained consumer strength amid higher prices. Earlier this week, Conagra’s results showed it couldn’t make price increases affect its bottom line against input costs, but CEO Sean Connolly said Thursday that “demand has remained strong against our price actions to date.”

Conagra is planning further price increases.

Julio V. Miller