Sky-high US inflation is giving consumers pause before buying

The news: US inflation accelerated in June, and rising prices continue to force consumers to make hard choices about what they buy and when they buy it.

• The Consumer Price Index accelerated 1.3% month-over-month (MoM) in June and 9.1% year-over-year (YoY), the largest gain since the end of 1981, per the US Labor Department.

A tough environment: Inflation was broad-based with prices rising across nearly every area of the economy. For example, grocery prices rose 1.0% MoM, restaurant prices grew 1.0%, and apparel prices increased 0.8%.

• Core CPI, which strips out the volatile food and energy components, rose 0.7% MoM, and 5.9% YoY.
• Consumers' spending power is declining as real average hourly earnings for all employees decreased 1.0% MoM in June, and 3.6% YoY, per the Labor Department.
• The situation is causing consumers to pull back on some discretionary purchases. For example, US chocolate retail sales volumes are down 2% to 3% over the last couple of months as prices have risen in the "high single-digit, low double-digit" percentage range, according to Reuters.
• Similarly 48% of consumers are cutting back on dining out, and 31% are spending less on entertainment and recreation, according to a May First Insight survey.

A pullback in spending: US consumers spent $74.1 billion online in June, a 6.0% MoM decline (and a 1% YoY gain), per Adobe.

• That dovetails with Barclays’ internal credit-card numbers, which suggest retail sales fell 0.4% last month, according to Bloomberg. While Bank of America’s card data saw a 0.3% gain in spending per household, that was mainly due to high gasoline prices, which forced consumers to curb other spending.
• Inflation affected 84% of Prime Day shoppers’ actions, per Numerator. Thirty-three percent waited for the sales event to purchase a specific item at a discounted price, while 27% passed on a good deal that wasn't a necessity. Inflation also drove 21% of individuals to comparison-shop on other websites before purchasing.

Not everyone feels the pain: Despite rising prices, higher income and younger consumers continue to spend on luxury. That trend is helping luxury sales continue to soar.

• 76% of consumers with an income of $200,000 or more plan to purchase the same or even more luxury items in the next three months than they did in the past three months, per the Saks Luxury Pulse survey of luxury shoppers.
• Notably, more Generation X (21%) and millennial and Generation Z (22%) respondents plan to purchase more luxury items in the next three months than those in the baby boomer and silent generations (16%).

The big takeaway: Inflation continues to eat away at most consumers’ spending power, which is forcing them to prioritize what, where, and when they spend. That’s one reason that we expect back-to-school sales to rise just 0.7% this year, and the thriftiness could affect the holiday season as well.

Go further: For more on The Era of Uncertainty, read our report here.