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Where the market sees signs of consumer inflation breaking point


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Wall Street executives and corporate America C-suites have a big question: How long will the strength of consumers last?

Consumers will eventually start to protest higher prices due to demand shocks, disruptions in supply chains, and rising energy prices. However, they are not there yet. The companies are able to pass higher costs on to the consumers. The current economic strength is due to higher wages and job market confidence.

Recent data in early earnings reports are encouraging. The last week was General MillsThe quarterly results of the survey showed that consumers are not looking to trade down on supermarket shelves.

Chris Growe, Stifel Analyst said “If General Mills’ performance is any indication of what to expect,” Their performance in this quarter was above expectations. And their guidance was excellent.

Stifel’s analysis shows that double-digit increases in pricing and cost savings combined with inflation will offset inflation.

Growe stated that there is so much price change (almost 11% for large-cap food businesses in February) that it should be enough to offset inflation. There is increasing confidence that this price/cost balance will hold in the near future.

Wall Street is pondering how long this good situation will last as it impacts both the bottom line and pockets. The inflation does not slow down so pricing up will only keep gross profit dollars flat. Stifel has found that grocery prices are causing more concern in recent surveys. That could increase the flexibility of food products branded by Stifel. Growe stated that private label products are on average 35%-40% cheaper than branded foods. This could lead to some trade down activity.

Wall Street and C-suite fear that grocery store prices will soon reach a breaking point for consumers.


While it hasn’t yet happened, CFOs from major corporations told CNBC they believe that it will.

Growe explained that “it could begin to happen in coming months” and added that higher elasticity might slow down the benefit of all the pricing.

The history of elasticity has been broken. This is the measure that measures how price movements relate to consumer demand. It’s clear that the consumer is at edge.

According to the University of Michigan Survey of Consumers, March 2013, the highest percentage of Americans expecting that their personal finances will decline in the coming year was found. This is the biggest increase since the survey began in the late 1940s. A quarter of households expect a decrease in inflation-adjusted household incomes over the next year. The story was heavily influenced by inflation. Consumers cited a lower standard of living due to higher inflation, more than any other period except for the worst two recessions that occurred in 50 years.

Ricard Curtin from the University of Michigan says consumers are still confident in rising wages and new employment opportunities. This will likely lead to moderate growth in spending for the near future. Even though the lower income consumers may have more firepower, higher levels of savings and stimulus packages continue to increase the household’s spending power.

Conference Board latest monthly confidence indexOn Tuesday, the gap between present and future was revealed. Present confidence in March was slightly higher, which is an indication that the economy remains healthy, while expectations continue to fall. In addition, consumers are now citing rising gas prices as a reason for their lowered hopes.

Gallup’s latest surveyOn Tuesday morning, roughly 1/5 Americans (or 17%) said that the highest problem facing the country was inflation or the high cost to live.

How important is the high-income consumer to the economy

Mark Zandi (chief economist at Moody’s), says that the high-income consumer plays a key role. The one-third of Americans in higher income brackets account for 75% of U.S. spending. Zandi stated that if high-income consumers don’t buy, there won’t be a significant impact on raw consumer activities.

For low-income households — by some estimates, over 60% of U.S. households are living paycheck to paycheck — high gas prices haven’t hit yet because they came into this cost of living change with excess savings and have been getting strong wage increases on top of that. Zandi explained that although they live paycheck-to-paycheck, Zandi added, “they haven’t had to reduce their spending yet.” Moody’s predicts that lower income consumers will be more careful this spring due to rising gas prices and the fact that there are now less savings.

In the Michigan survey, a third of consumers said that inflation had already reduced their standard of living. Gas prices and food are two of the most common purchases made by consumers. Curtin explained that the price of gas and food will rise. Curtin said that consumers have been saying, so far, that “if I don’t make a purchase right now, it’ll only get more expensive later.” He said that anticipatory purchasing is an example of a self-generating cycle. Although the Russia-Ukraine War is a major inflation trigger for energy and food, he stated that the data indicates there’s a high probability companies can continue to pass on costs the rest of the year. Consumers will still be open to the idea.

The combination of inflation and war in Europe has meant that consumer sentiment readings can be difficult to predict. But even if sentiment is swayed by these factors — as well as politics, which Curtin said has been rising as a partisan divide in the data — the recent data show that consumer sentiment is fragile.

Zandi explained that discretionary purchases and expenditures on steak and meat start to fall. Or, you will see a decrease in the number of people eating out at low- and mid-income establishments, like chain restaurants. The real indicator is when they trade down on various consumer goods. 

Zandi watches over the entire thing. cracks in the housing marketThese are already evident in the pending sales of homes and current home sales that have been sold. Zandi stated that we expect the housing market to slow down and prices will drop.

Housing market prices have been strongIt is because the housing sector is one of the most sensitive to rate changes and has already begun showing signs of stress due to rising mortgage rates. This also plays a crucial role in how consumers feel about their financial situation. There are many other consumer activities that result from the sale and purchase of homes. These include furniture and cars as well as home improvements and new purchases. Zandi stated that there will be large ripple effects. Another link would be house prices, people feeling more comfortable borrowing from cards, and feeling like they have equity. This doesn’t feel possible. It’s fragile.”

The Michigan survey of consumer preferences has an excellent track record in forecasting recessions since the post-World War II period. The survey falls six to one year before an economic downturn and it’s falling right now. Curtin stated, “We’re in for a tough time.”

This chart shows the University of Michigan Index of Consumer Expectations forecasting recessions.

University of Michigan Surveys of Consumers