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The biggest question about inflation for the economy? Only the consumer knows the answer

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Vera Petronina | iStock | Getty Images

A big question on the minds of Wall Street and C wings across corporate America is consumer power, that is, how long can it last?

At some point, consumers will begin to hold back from higher prices caused by demand shocks, supply chain disruptions, and higher energy prices. But they haven’t yet. So far, companies have been able to afford higher costs, and consumers have been willing to pay. Higher wages, confidence in the labor market, and a historically high rate of savings among Americans that are not yet fully exploited contribute to today’s economic strength.

The latest data from early earnings reports is encouraging. Last week, General Mills’ quarterly results showed no indication that consumers are looking to “discount” on supermarket shelves.

“If General Mills is any indication, it’s all good,” Stifel analyst Chris Gru said. “I don’t want to exaggerate, but their performance in the last quarter was solid, compared to expectations, and their guidance was better.”

According to Stifel’s analysis, the double-digit price increase in the last quarter, along with cost savings, will offset inflation for the company.

“There’s a lot of prices coming in (it’s up about 11% in February for our big-cap food companies) that it’s actually enough to offset inflation,” Gru said. “There is an increased degree of confidence in the relatively near term about this pricing/cost balance.”

But how long this status as a good one for both bottom line earnings and pocket jackpots is on Wall Street’s mind. Inflation does not go down, so raising prices only keeps the countries’ total profits constant for most companies. Stifel’s recent survey data found more consumers worried about grocery prices. “This could lead to higher levels of flexibility for branded food products. With private label products on average roughly 35%-40% below the price of branded food, we could start to see some activity commercial,” Gru said.

Wall Street and the C-Wing are concerned that the consumer meltdown point in grocery store prices is approaching.

Stifel

That hasn’t happened yet, but CFOs of major companies told CNBC that this is a factor to watch until the second half of 2022.

“It could start to happen in the coming months and higher flexibility could slow down the benefit of all prices,” Groh said.

Elasticity, a measure of the relationship between movement in price and consumer demand, has broken history this year. But it is safe to say that the consumer is in a state of stress.

A University of Michigan survey of consumers for the month of March found that expectations among Americans that their personal finances will get worse next year have grown by the most since the survey began in the mid-1940s. Half of all households expect a decline in inflation-adjusted incomes next year. Inflation was a big part of the story, with more consumers citing lower living standards due to higher inflation than at any other time except during the worst recession in the past 50 years: from March 1979 to April 1981 and May to October 2008.

Still, consumer confidence remains strong, with confidence in rising wages and jobs — more than 4 million Americans left their jobs in February — likely to maintain moderate spending growth for the foreseeable future, however, University of Michigan survey director Richard Curtin says. Moreover, stimulus packages that have increased savings continue to boost the purchasing power of higher-income households, even if lower-income consumers have less firepower.

The latest monthly reading of the Conference Board’s confidence index released on Tuesday showed this gap between the present and the future, with current confidence rising slightly in March and higher for the first time this year, in a sign that the economy remains strong, but expectations are falling again, citing consumers. High prices, including gas prices.

The latest Gallup poll of Americans Abroad Tuesday morning found that nearly one in five Americans (17%) says the rising cost of living, or inflation, has been the nation’s most important problem.

The importance of the high-income spender to the economy

The high-income consumer is key, notes Mark Zandi, chief economist at Moody’s, with a third of high-income consumers accounting for 75% of all spending in the US economy. “If higher-income consumers are out buying, we won’t see much of an impact on raw consumer activity,” Zandi said.

For lower-income families — according to some estimates, more than 60% of American families live off paycheck to paycheck — higher gas prices haven’t yet affected because they went through this cost-of-living change with excess savings and were getting strong wage increases in overdrive. that. “They’re living off their paychecks for a paycheck, but they haven’t had to cut back on spending yet, but that’s coming,” Zandi said. Between higher gas prices and the excess savings beginning to decline, Moody’s expects low-income consumers to start being more cautious this spring.

A third of all consumers in the Michigan survey spontaneously stated that inflation had already reduced their standards of living, and Gas prices and food prices are the two most common consumer purchases. As those prices go up, Curtin said, the pain will only increase. But so far, “consumers are saying, ‘If I don’t buy now, it will cost me more later.’ So you have proactive buying and this is a self-generating cycle.” While the war between Russia and Ukraine is a primary inflation factor for both food and energy, he said the data suggests there is a good chance companies will pass on costs for the rest of the year and consumers will be receptive.

Consumer sentiment readings are also uncertain, given the pandemic era concern, now combined with inflation and war in Europe. But even if sentiment is affected by these factors — as well as politics, which Curtin said is heightened by the partisan divide in the data — recent data shows that consumer sentiment is fragile.

“Look at discretionary items and spending on meats and steaks, and start to decline, or you start to see eating less at restaurants that cater to low- and middle-income families, chain restaurants,” Zandi said. “When they trade down various consumer items, that’s the real saying.”

Zandi is also watching for cracks in the housing market that are already evident in pending home sales and existing home sales. “We expect home price growth to hit the wall very soon, and we may see some price declines, not next month, but certainly by this time next year,” Zandi said.

Housing market prices have been robust, which is key because not only does housing in the most rate-sensitive sectors of the economy already show signs of stress as mortgage rates rise, but the inevitable damage is key to how the US consumer feels about their overall finances. When people buy and sell their homes, they make many other purchases as well, from cars to furniture to home improvement, and that leads to a lot of extra consumer activity. “The effects of the wave are going to be significant, and the other link is home prices and people feel they have equity, feel better borrowing against the cards,” Zandi said. “I don’t feel like this can go on. It feels weak.”

The Michigan Survey of Consumer Expectations has a long track record of predicting a recession throughout the post-World War II period. It’s regressing before an economic downturn, on average six months to a year ahead, and it’s regressing now. “We’re in a tough time,” Curtin said.

The University of Michigan Consumer Expectations Index predicted recessions, which are indicated by gray bars in this graph.

University of Michigan Consumer Surveys

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