The Inflation rate cajoled to 4.9 percent year-over-year in April 2023 after marching to the beat of the drum of June’s 40-year high of 9.1 percent. While that is good news for struggling consumers, it isn’t a telltale of how much Americans are spending due to rising prices. What has been inflation’s impact on consumer spending post-pandemic? 

Inflation had remained low during the initial phase of the pandemic but as demand and supply-side factors changed, the prices increased, hoisting inflation up with it. 

It is widely expected that the inflation rate will continue to decline throughout 2023, easing back to 2.6 percent by 2024. These forecasts reflect a slowing economy making borrowing more expensive. The splice between consumer behavior and inflation – excessive consumer spending is discouraged. 

Albeit the Federal Reserve is trying hard to combat the price fluctuations by raising interest rates, other fears are being stoked. If the Fed goes overboard, the economy can dramatically tip into a recession, with higher rates freezing demands. 

What is the impact of inflation on consumer behavior? How have Americans changed their spending or borrowing habits in the trepid economic environment?

Consumers Were Saving Money During Inflation

Most analysts believe that Americans have been enduring sticker shock – even though people were balking at the rising costs of all utilities from groceries to gas, they were spending. The CPI (Consumer Price Index) tracks how far Americans spend for purchasing groceries, gas, utilities, automobiles, healthcare etc when saving money during inflation is imperial. 

In June 2022, grocery prices experienced their largest year-over-year increase since 1979 by 12 percent. The cost of other essentials on the Index increased by 20 percent. To cope, many Americans changed their spending habits by disbursing budgets and shopping at discount stores. Some skipped red meat and fish, while some canceled extra subscriptions for saving money during inflation. 

American shoppers started scrutinizing their expenses and adjusting their spending habits. The change in consumer behavior due to inflation, affected retailers across the country, from giants like Walmart to even the next-door supermarket which sought to deliver affordable products to customers. 

“We are seeing price discounting and consumers are searching for those promotions to spend around that promotion cycle. Maybe inflation psychology has been amazingly well contained.”

Inflation’s impact on consumer spending can be attributed to April 2021 when the cost of home-prepared food rose by 20 percent. The price of various cooking staples has been skyrocketing since. Wholesale producers struggled to meet demands after backpedaling on production in the early pandemic. While prices declined after peaking in late 2022, they are still 20 percent up the ante over the last two years. 

Impact Of Inflation On Consumer Spending

During the pandemic, people were chock-full of cash due to reduced spending. But on the supply side, gas prices increased and supply chain issues paved the way for shortages in labor and transportation. 

Like a Goldilocks story, Americans kept spending, defying high inflation and sharp interest rates. People were willing to pay higher prices because commodities would be more expensive next year. 

“If prices are going to go up in the future, it’s better to get it now because it’ll be more expensive tomorrow.”

Consumer spending habits can tame inflation without derailing the economy. The economy rebounded into a phase in which growth might not be dynamic because consumers have been continuing to spend, but just not at breakneck speed. 

It is also striking to note that lower inflation expectations can reverse the dynamic and cool inflation. Decreasing inflation expectations are actually unambiguously better for the inflation fight.

Fed officials have signaled optimism about Americans’ inflation expectations remaining subdued. But, consumers and businesses have expressed a sentiment of caution – preventing accelerated spending to reignite inflation. If the trend sustains, the economy could be humming enough to help prevent the impending recession. 

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