A Blog by Jonathan Low


Nov 26, 2021

Why Inflation + Supply Chain Woes Havent Stopped Consumers, But Changed Shopping

Many more people are doing better economically, which translates into strong sales for merchants. 

Consumers seem to be shopping earlier and more in person, but have not curtailed purchases due to higher prices, largely because they have more money to spend and feel more optimistic about the future. JL

Emily Stewart reports in Vox:

Despite inflation and supply chain woes, consumers are determined to forge ahead. More people are working more hours at higher wages as they go back to work and get paid better. "More people employed means more income and more total consumption.” Overall, many people are better off. Walmart, Home Depot, Target, and TJX (the parent company of TJ Maxx and Marshalls) posted strong third-quarter earnings and expect holiday business to be good. Consumers seem more concerned about being able to get items than what they’re paying for it.

Holiday shopping is going to be annoying this year. Many things are more expensive, and in-demand items are hard to find. It’s a real “All I want for Christmas is to stop hearing about supply chains and inflation for half a second” moment.

While it’s a weird time in the economy, that weirdness isn’t necessarily translating to people holding back on buying. People are shopping a little differently this holiday season, but they’re not not shopping. Nearly two years into a pandemic, the American consumer will not be deterred, at least not entirely.

But they probably won’t be happy about it. The consumer price index, which measures what consumers pay for goods and services, increased by 6.2 percent from a year ago in October, and it crept up by 0.9 percent over the course of the month alone. Regardless of the arguments over how serious a threat inflation is to the American economy right now (some economists say it’s a big deal, others that it’s not), consumers hate it. The price of food is up 5.3 percent over the last year, meaning holiday meals are going to be more expensive. Gas is pricey, too, meaning so is traveling by car. Big-ticket items, including cars, are more expensive, but so are smaller-ticket ones, like apparel.

Likewise, supply chain problems are popping up in many places. Before people can even worry about how much something is going to cost, they’ve got to first wonder whether they’re even going to be able to get ahold of it.

Despite the one-two punch of inflation and supply chain woes, it seems like consumers are determined to forge ahead. Some people are spending a little earlier, but they still appear to be spending. As the job market improves and more people get back to work, they’ve got more money to put out there, which they are.

“You get more people employed, and obviously, more people employed means more income and therefore it means more total consumption,” said Michael Gapen, head of US economics research at Barclays. “None of this is to say that we should be happy with where inflation is — it’s a problem.”

Consumers are annoyed, but still buying

Consumers are certainly not happy with the current economic situation.

The University of Michigan’s consumer sentiment index, which measures how consumers are feeling, fell to its lowest level since 2011 in November. Richard Curtin, chief economist at the survey, in commentary on the results, said the sentiment is a result of the “escalating inflation rate and the growing belief among consumers that no effective policies have yet been developed to reduce the damage from surging inflation.” People were especially frustrated with the rising prices of homes, vehicles, and durable goods.

To put the way consumers are feeling in perspective, they feel worse than they did in April 2020, when the Covid-19 pandemic was sweeping the country, and it really seemed as though the United States might be heading into an economic depression. To be sure, there’s a partisan divide with these survey results (Republicans feel bad about the economy with a Democrat in the White House, Democrats feel bad about the economy with a Republican in the White House), but people are still generally displeased with the economy.

Still, they plan to spend or, at least, try to. According to a survey from the Conference Board from October, consumers are poised to spend an average of $1,022 on holiday gifts and related items this holiday season, with $648 going toward gifts and $374 being directed elsewhere. The gift spending is slightly down from 2019 and 2020, perhaps in part because people are expecting to be able to socialize more this year and accrue costs associated with that.

“We saw a little bit of a decline in what they said they intended to purchase for gifts, but nothing really substantial,” said Lynn Franco, senior director of economic indicators and surveys at the Conference Board.

The Conference Board’s survey found that people are ready to get back out there and head to the mall on Black Friday and beyond, as concerns about the Covid-19 outbreak lessen. People anticipate buying gift cards as well as apparel, toys, and games.

“They do expect to pay more for both food and gifts this year compared to last year,” Franco said. “At least at this point in time, it doesn’t appear to be deterring or impacting spending overall.”

Nikki Baird, vice president of retail innovation at Aptos, a retail technology company, said some retailers are, in part, anticipating a “back to basics” holiday. Some retailers narrowed the assortment of products available on their shelves in light of the uncertainty surrounding the holiday, replicating a tactic they used around back-to-school time. It’s not that you’re not going to be able to find, say, holiday candles; it’s just that there will maybe be 10 options instead of 20. This year, there’s also no big must-have toy.

“There’s no character-driven merchandise from blockbuster movies, there’s no toys from blockbuster movies, because there haven’t been any blockbuster movies,” Baird said. “It’s fascinating to me to see that parents are really concentrating on back-to-basics toys.”

Holiday shoppers are shopping earlier (and stores are still offering discounts)

Current economic conditions aren’t necessarily stifling holiday shopping, but they are changing it as people try to adjust to the current landscape.

October retail sales rose by 1.7 percent compared to the previous month, according to the US Department of Commerce. Consumer spending went up in online shopping, electronics and appliances, department stores, building materials, cars, sports, and music, among other items. With the news, JPMorgan upgraded its expectations for economic growth in the fourth quarter.

Part of what’s going on is that people seem to be doing their shopping a little earlier this year. Given all the headlines about supply chain woes and potential shortages, it’s understandable. So some of the holiday retail sales that would normally take place in November and December were pulled into October.

Baird said that the retailers she works with are certainly seeing some earlier shoppers this year compared to holiday seasons past. Thus far, consumers seem more concerned about being able to get items than what they’re paying for it. “They are less price-sensitive,” she said. “They’re not put off by the higher prices; they’re more concerned about availability.”

Retailers are putting forward relatively rosy forecasts for the holidays despite hiccups. Walmart beat third-quarter earnings expectations after its sales rose and said it’s preparing for a “strong holiday season.” Home Depot, Target, and TJX (the parent company of TJ Maxx, Marshalls, and HomeGoods) posted strong third-quarter earnings as well and expect holiday business to be good, despite some challenges. Ernie Herrman, the CEO of TJX, said the company is in an “excellent inventory position, with most of the product needed for the holiday season either on hand or scheduled to arrive at our stores and online in time for the holidays.”

How retailers are handling inflation pressures can vary. As CNBC notes, Walmart and Target are trying to keep their costs low in order to keep customers coming back, even if that cuts into their profits. It’s not a strategy investors love.

There’s a sort of game of chicken that retailers have to play with each other every year around the holidays. They’re competing to capture what is typically a relatively set budget on the part of consumers. Discounts and promotions are a way to get consumers in the door; the hope is they’ll fill up their carts while they’re there.

Baird said that Aptos has noticed that retailers are offering fewer or shallower discounts, which may be a way to deal with inflation. “They are offering promotions to try to attract consumers, but they either scaled back the depth of the promotion or how many things are on promotion,” she said. Instead of, say, offering 40 percent off the entire store, a retailer will offer 25 percent off winter accessories. “Part of it is also an inflation hedge. You don’t have to raise prices on your base price if you’re offering a shallower discount because you’ve got some protection in your margin built in.”

Some retailers are also shifting their inventory around in an attempt to combat potential shipping issues, in the e-commerce space especially, Baird said. She expects some retailers will move items to physical stores and encourage consumers to shop in store or order online and pick up instead of depending on direct-to-consumer e-commerce shipments, especially as the holidays approach.

This holiday economy is still better than the last one

Here are some headlines from around this time last year: “The US Covid outbreak is worse than it’s ever been.” “On the eve of Thanksgiving, the US recorded its highest single-day coronavirus death toll since May.” “Trump vetoing the Covid stimulus bill could be disastrous.” None of that was good.

The US seems better positioned with the pandemic than it was a year ago — vaccines are widely available, and many people have gotten them. Coronavirus case counts have risen again recently in some parts of the country, but are still below where they were last year at this point. With the economy, things are generally better, too. Government stimulus has put real money into real people’s pockets. The country is continuing to add back the millions of jobs lost. The October 2020 unemployment rate was 6.9 percent; the October 2021 unemployment rate was 4.6 percent.

Gapen noted that wages have on average kept up with inflation, though price increases are cutting into some income gains. In the bigger picture, on aggregate, labor market income is going up because more people are working more hours at higher wages as they go back to work and get paid better. In October, the economy added 531,000 more jobs, and numbers from August and September were revised upward by an additional 235,000 jobs.

“That’s three-quarters of a million more people who will be earning income,” Gapen said. “They are going from, in theory, earning nothing to earning whatever the median income is in the US. So yeah, inflation’s gone up, but your purchasing power’s just gone up by a lot more.”

None of this is to say that there aren’t real problems or that the economy is perfect. The supply chain issues are complicated; so is inflation. If you want to buy a new car right now, it’s going to be much pricier than it would have been a year ago. Home prices are up a ton if you’re on the market. Overall, daily life is costlier, including gas and food. And if you are spending more to put gas in your car, you might wind up spending less on Christmas presents, or at least consider it. There are a lot of open questions about when things will get back to normal, and about what “normal” will look like. Still, overall, many people are better off.

Thus far, it looks as though many consumers are determined to celebrate the holiday as usual, by spending money. And if you have to buy a little less or differently but are able to spend the time more safely with your loved ones, it’s not the worst trade-off in the world.


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