High Inflation Starts to Curb Consumer Spending

Several U.S. companies have reported that inflation pressures are starting to take a toll on consumer spending.  From Whirlpool (WHR) to Procter & Gamble (PG), companies note that consumers are reducing their spending, which accounts for more than two-thirds of U.S. GDP. 

The consensus is that Thursday’s U.S. Q3 personal consumption report will grow at an annualized pace of only +1%, the weakest since the early days of the pandemic and half the pace seen in Q2.  Wells Fargo said, “it’s hard to increase your consumption if your real income is heading lower.” Households must rely on savings to help keep “consumption where it is.” U.S. real average hourly earnings data show that inflation has outpaced wage gains on an annual basis every month since April 2021. 

Last week, Whirlpool CEO Bitzer said “ongoing macroeconomic headwinds and continued levels of inflation” resulted in slowing demand.  Also, Winnebago Industries (WGO) CEO Happe said the combination of higher food and gasoline costs, rising interest rates, and the “inflation of the products themselves” is squeezing consumers.  In addition, Hasbro (HAS) said consumers are becoming “increasingly price-sensitive,” and Procter & Gamble said it saw “some volume reduction” due to price increases and general inflationary pressures.

Despite signs that high inflation is leading to stagnating retail sales, many services, including air travel, continue to see robust demand.  Even though airfares have surged nearly +43% in the past year, American Airlines Group (AAL) said last week that it sees no signs of slowing demand. However, surging prices are prompting consumers to cut back on eating out.  A survey from research firm Datassential found half of the consumers had recently cut back on restaurant meals due to high inflation.

Uncertainty about consumer spending is weighing on many companies.  For example, trucking firm Knight-Swift Transportation Holdings (KNX) warned last week of a rapid slowdown in the freight market, with businesses slowing their orders out of concern that consumer demand won’t hold up.  Moreover, looking to next year, the outlook for consumer spending is not promising, especially if rapidly rising interest rates begin to lead to a significant softening in the U.S labor market.

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