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American consumers are becoming price sensitive again

aAbout SKED The state of the economy, Americans are surprisingly pessimistic. More than half say they are experiencing financial difficulties. More than 1 in 3 said they have difficulty paying regular household bills. Still, research shows Americans are tightening their belts amid sustained high inflation, but data shows they continue to spend at a healthy clip. Last month, the Bureau of Economic Analysis reported that inflation-adjusted consumer spending was up 1.8% year-on-year. Consumer spending is up by double digits, according to a report by the Bank of America Institute, a think tank, indicating that American shoppers are “still spending.”

This resilience can be partially explained by mattress load savings. During the pandemic, the American accumulated over $2 trillion of his excess savings. The federal government has provided unemployment benefits and economic stimulus, even as households cut back on travel, entertainment and dining out. Some of that has been spent, but households still sit on a cushion of $1.4 trillion, thinks Ian Shepherdson of consultancy Pantheon Macroeconomics. The labor market is also healthy. The unemployment rate he dropped to 3.5%, the lowest level in 50 years. In August, he had 10.1 million vacancies, and he had 1.7 vacancies per unemployed person.

But another less-acclaimed reason why spending has remained so stable in the face of inflation spikes is changing consumer sensitivity to price, or “price elasticity of demand.” The concept is rarely mentioned outside of economics textbooks, but it has been the subject of heated debate among investors and corporate executives over the last year (see Figure 1). The term has come to be used in earnings reports of consumer goods giants such as PepsiCo. PepsiCo’s boss spoke of a favorable “demand elasticity trend” while announcing its unexpectedly strong quarterly results on Oct. 12.

The available data seems to back them up.Aggregate value Irimarket research firms suggest consumers are actually less price sensitive than they were before the pandemic. Using scanner data on prices and sales recorded each time Iri estimate that since February 2020, 22 out of 25 commodity categories have had lower price elasticities, while the other three have remained flat (see Figure 2). said all, Iri Consumers believe they were about 20% less price sensitive in the 52 weeks ending September 4 compared to the year before the pandemic.

why shift? Experts say he gives three possible reasons. First, as panic buying emptied supermarket shelves early in the pandemic, consumers adjusted their shopping habits and tried brands they were unfamiliar with, says Brett Gordon, a marketing professor at Northwestern University. say. As people spend more time at home, they are more comfortable buying more expensive foods and household items.Finally, government statistics show that the amount of time consumers spend shopping will increase in 2019. reduced by about 9% between 2020 and 2021. The way we use it has also changed. “Many people may spend more time shopping to furnish their homes, but less time worrying about everyday consumer goods,” said Alexander McKay of Harvard Business School. ‘ said.

There are some signs that consumers are starting to pull back. Retail giant Walmart says shoppers are switching from expensive deli meats to hot dogs and from gallons (3.8 liters) of milk to half-gallons. Electronics retailer Best Buy says more customers are choosing its own brands. tv setThan the set of the name brand. These changes in consumer behavior are most pronounced among low-income households. tjxFor the first time in years, the discount department store said its stores in high-income neighborhoods are growing faster than those in low-income neighborhoods. “Mid- and high-income consumers continue to spend,” explains Krishnakumar Davey. Iribut “low-income stores and low-income consumers are taking a bit of a step back.”

This will be on the minds of investors as US publicly traded companies report quarterly earnings in the coming weeks. Those who expect a definite answer may be disappointed. Packaged goods companies agree that shoppers will start to shy away from higher prices, but there is far less consensus on exactly when that will happen. As I told investors at the beginning, “I expect it to be more resilient at some point in the future. Will it be next quarter? Or next year? I can’t tell you that.”

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https://www.economist.com/business/2022/10/13/american-consumers-are-becoming-more-price-sensitive-again American consumers are becoming price sensitive again

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