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‘Double-Digit Inflation’ Spells Trouble for Consumer Spending

Sales growth could shrink in the coming months if inflation continues to rise, despite strong first-quarter consumer spending, according to Mastercard date cited at Sourcing Journal’s Global Outlook Conference last week.

In fact, consumer spending has been a moving target for the past two years, said Mastercard vice president Michael McNamara. Now, “instead of having all of the demand really concentrate on several retail categories that were kind of pandemic related, we’re starting to see a much more diversified consumer and more normalized spending across not only retail categories, but also services categories,” he said. A strong employment market and rising wages put consumers in a good position to spend. Apparel sales climbed 16 percent from March 2021 to the same period in 2022, while department stores saw a 14 percent increase in foot traffic year over year.

Rising prices could chip away at spending on clothes and shoes. “As we move forward, we are expecting inflation to eventually start to erode more of the consumer purchasing power,” McNamara said.

“We expect to continue to see elevated inflation rates as we move through 2022,” he added. While the federal government is moving to control economic growth, sustained supply chain disruptions “could continue to result in a more elevated price environment, at least for the near term,” he said.

Mark Cohen, director of retail studies at Columbia Business School, described inflation as “a byproduct of turmoil and disruption.”

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“We’ve just gone through two and a half years of Covid-driven turmoil and disruption,” after many years of being “spoiled” by low inflation tied mostly to energy costs, he said in a panel discussion on the consumer and the economy.

Morgan Stanley economist Sarah Wolf agreed that food and energy prices are really feeling the heat, with inflation hitting low-income and middle-class households’ discretionary spending the hardest. March’s surging oil prices could haunt consumers for months to come.

“We were expecting a lot of the deflationary pressures to have already started on the goods front,” Wolf said. Lockdowns in China and Russia’s Ukraine invasion only prolong supply chain disruptions and further limit product availability.

Salesforce director of consumer strategy and insights Caila Schwartz believes that clues about the future of consumer spending in the U.S. can be found in Europe’s reaction to the Russia-Ukraine war. “Our Q1 Europe analysis shows that pretty much across the board, retail growth is down,” especially from an e-commerce perspective,” Schwartz said. Not only have sales suffered, but order volume for discretionary categories has dropped year over year.

Panelists at Sourcing Journal's Global Outlook Conference discussed inflation and its impact on consumers.
Panelists at Sourcing Journal’s Global Outlook Conference discussed inflation and its impact on consumers. Sourcing Journal

“Europe is certainly the first to feel the effects of the geopolitical issues happening in the world right now,” Schwartz said. “In the U.S., we’re a little bit more shielded, but if things continue, I expect that some of those trends will start to pop up over here.”

Schwartz expects inflation could continue its upward trajectory this year. “We were looking at double-digit inflation for March,” she said. “And the longer this continues to drag on, the more it’s going to affect consumer optimism.”

While spending is likely to dip, Wolf said her understanding of employment data suggests a recession is unlikely. “We’ve been getting a lot of questions actually on recession risks for this year and for next year, and the one thing that we keep pointing to is the labor market and how strong it is,” she said, adding that “we’re really not seeing” the high unemployment numbers that typically precede a downturn.

In fact, Wolf pointed out that unemployment is back to the pre-pandemic low of 3.6 percent. “Labor demand is tremendous, and supply is quite limited,” she said, noting the seismic shifts in the workforce with many retiring early in the past two years on top of shifting attitudes about the culture of work.

Cohen agreed that retail is undergoing much-needed changes.

“Retailers have been guilty of using and abusing the workforce up until maybe a year or so before Covid,” he said, citing the mass seasonal hiring typical to holiday commerce. Many U.S. workers won’t stand for that kind of instability. “Now there’s tremendous competition for retail workers, and wage rates have risen sharply,” driven by retailers like Amazon, Walmart and Target seeking to “minimize the catastrophic turnover that they’ve been facing,” Cohen said.

Omnichannel gets much of the credit for overhauling the retail worker’s job description seemingly overnight as packing orders for curbside and in-store pickup suddenly became the norm. “That was a huge transition for that traditional store associate role,” Schwartz said.

Retailers are likely to face these headwinds for a while. “It has become a lot more complicated,” she said.