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Inflation causes Americans to cut back on spending

Written on Apr 11, 2022

Even with a strong job market and wage gains, as well as Covid stimulus savings, pricing spikes in core spending categories including food, gas and shelter are leading more Americans to rein in their spending. 

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

Lower-income households are the most at risk, and they are the ones most likely to be making unwelcome tradeoffs to make their money stretch as far as it did just a few months ago, according to the survey results. They are also clearly experiencing more financial anxiety, according to the survey, with 57% of Americans with income under $50,000 saying they are under more stress than a year ago, versus 45% of those with incomes of $100,000 or more. The 68% of high-income consumers who said they are worried higher prices will force them to rethink financial decisions is significantly lower than the 82% of Americans with income of $50,000 or less who told the survey this, but it is still a majority. 

More than half of people with household incomes under $50,000 say they have already cut back on multiple expenses due to prices, and for those with income of at least $100,000, the cutback levels are already similar when it comes to dining out, taking vacations and buying a car. 

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

Experts say a unique set of issues that could be exacerbating this gap narrowing including the potential for Russia’s invasion of Ukraine to do more damage to the global economy than forecasted and the fact that the majority of the population has not experienced 10%+ inflation, or 15% mortgage rates, as past generations had. 

All income groups in the survey are equally likely to say the economy will enter a recession this year, at over 80%. But there is a key caveat: actual spending actions from the economy don’t yet indicate this prediction will come true. 

Despite the downbeat feelings about their financial situations, and cutbacks, consumers are still spending strongly. There are now lots of jobs, unemployment is low, debt loads are light, asset prices are high, and there is a lot of excess saving. Even if people are cutting back, spending less on some items, the mood has not yet taken control of the spending motivation to a degree that amounts to more than a slowdown in economic growth.  

The Conference Board’s latest monthly confidence index reading showed present confidence up (slightly) for the first time this year, but the expectations index lower, with consumers citing rising prices, including gas. 

Key factors that CFOs are watching include the decline in the consumer savings rate; how successful the Fed is in 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 Conference Board’s most recent CEO survey showed that companies are passing along the costs of inflation relatively quickly to consumers, and that pattern is likely to continue in the months ahead, with wage gains a contributing factor.