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The Price is Not Right: Retail in the Time of Inflation

Apr 20, 2022
GroupSolver article about inflation and consumer reaction

In the next 12 months, we expect the cost of our groceries to increase by about 10%. We blame high price inflation on supply chain issues, government spending and politics, but we see lingering effects of the pandemic and Russian invasion of Ukraine as contributing factors. As a response, consumers who took our recent pulse check survey are shifting their sights to cheaper private label brands, discount retailers and deal hunting. Many are worried, particularly those living on fixed income. They anticipate a struggle in maintaining their standard of living, impacting their ability to care for themselves and their families.

When we ran a pulse check study checking in on our mental health in late March, about one third of our respondents considered the state of their mental health to be less than good. In that study, finances – cost of living and lack of money – was the most supported driver impacting mental health of Americans, with about 80% of our respondents agreeing with this sentiment. With the unemployment rate at historically low levels and continued government spending in efforts to boost the economy, price inflation is the issue that has increasingly and consistently occupied the center of our minds and news headlines.

Publicly reported inflation is typically stripped of the most volatile items in the consumer’s basket, such as food and gas. But the reality is that for consumers in the middle and lower end of the earning spectrum, those most volatile items are the ones that make a massive difference in their well-being. Folks living on lower incomes spend a relatively bigger chunk of their earnings on food and transportation. That is why a significant spike in prices of those items has an enormous effect on their economic stability, evolving into a meaningful contributor to their stress. Looking at our data, consumers have been feeling the pressure of growing food prices for a while now, and they are expecting that pressure to remain high within the next year.

About one-third of our pulse check respondents feel grocery prices have been at 10%+ rate over the last 12 months, and they are likely to continue to grow at this rate in the next 12 months.

GroupSolver retail inflation article

If you ask any economist about the dangers of inflation, they will likely tell you that inflation truly starts being a problem only when it becomes imbedded into consumers’ expectations and planning decisions. For example, when they get baked into higher wages and contracts negotiated between businesses. There is no hard evidence yet that this is happening, but our survey hints that this process may be starting now. The sample of 215 respondents to our quick survey on April 12th and 13th suggests that they don’t see high grocery price inflation as abating in the foreseeable future. 75% of them expect grocery prices to continue increasing, and more than half of them expect the prices at the grocery cash register to be 10% or higher a year from today than they are now.

GroupSolver open-end reasons for inflation

In their own words as a response to our AI Open-End™ question, consumers perceive the main reasons for the price to be supply chain shortages and government policies, ranging from 69% to 86% support among our panelists. Pandemic and the war in Ukraine are seen as major contributors by about half of our respondents. This data paints a similar picture to what economists may say, with the key difference being the outlook into the future, where many economists continue to expect inflation’s “soft landing” in the near future as the supply chain issues resolve themselves… whereas our respondents don’t see that happening in the next 12 months.

We, of course, do not have a crystal ball to predict when the inflationary pressure may diminish, or when grocery price increases start to slow down to more manageable levels consistent with pre-pandemic trends. We can, however, ask the ‘what if’ question assuming our respondents are right and grocery prices will continue to rise at their current rates. What would that mean for the consumers, and by extension, for product brands and retailers?

Expecting grocery price inflation of about 10%, consumers will look for sales and discounts and look for store brands to, potentially buying less.

GroupSolver open-end about grocery impact from inflation

GroupSolver IdeaCloud™ expected impact on groceries from inflation

A trillion-dollar question: will high inflation stick around?

Going back to our earlier question on inflation becoming a “real” problem, it is hard to tell from one survey if we have already entered the vicious cycle of self-fulfilling prophecy of enduring inflation. However, our pulse check survey indicates that workers’ wage expectations may be rising. Three-quarters of our respondents expect the cost of groceries to increase in the next 12 months. Of those respondents who are currently employed, almost half (42% to be precise) expect their income to rise in the next 12 months, and almost one-third (27%) expect that their increased income will make up for their increased cost of living. This means that about one quarter of those currently employed expect an equal or greater pay increase in the next year than is the rate of inflation, currently at about 6% (or more if we also consider prices of food, gas and housing).

GroupSolver inflation pie chart about income

While many workers may feel good about their future income growth, what about those who do not expect their income to make up for the cost of living increases? Students, retirees and other people on fixed income facing higher prices of essential products have shared with us their thoughts on what such increases mean to them besides switching to generic brands and discount stores: stress, cutting back on purchases, and sales deal hunting. In the words of some of our respondents, in response to rising grocery item prices they say they will “…try to be selective with [their] choices in food (91% expected support)” and “… have to find discounts in order to feed [their] families (80% expected support).”

For almost fifty years, inflation has existed as a more-less theoretical concept that our economists believed could be managed by subtle modern fiscal policy and healthy economic growth. While this still may be the case in the aggregate, for Americans living at the lower end of the income spectrum, inflation is no longer theoretical or subtle. With tens of millions of Americans living on fixed and or low income, a return to the inflation rates of the 1970’s and 1980’s would be devastating. The impact may be profound on retailers and brands as well, as more consumers will seek value in their product purchases and cut down on discretionary spending. Hopefully, the next few months will bring us good news on global supply chains and overall economic recovery and this article will remain only a “what if” exercise. However, future favors the ready and it is better to be prepared for the worst while hoping for the best than vice versa.

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