On Friday, the Bureau of Labor Statistics announced that inflation hit 8.6 percent, which is the highest it’s been in the last 40 years. Earlier this week the Producer Price Index, which reflects wholesale prices, hit 10.8 percent and remains near record levels. Prices are rising at every step in the process of getting goods from the factory to retailers’ shelves.
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In the face of rapidly rising prices, consumers are changing their shopping behavior. According to a recent NRF study, almost half of consumers are switching to cheaper alternatives and looking for coupons or sales more often when shopping for everyday necessities. Forty-one percent are shopping at discount stores and 40 percent are cutting back in other areas so they can afford these purchases.
Despite these changes in consumption behavior, inflation is taking a growing toll on consumers’ finances. In a recent NRF poll, 58 percent of American consumers reported they are either dipping into savings or going into debt to pay for higher prices. The news gets much worse for lower-income households: 72 percent of households earning less than $25,000 are using their savings or debt to finance higher prices. As the Federal Reserve continues to ratchet up rates, the cost to consumers is going to get worse as interest rates rise.
The growing pressure on U.S. consumers is evident when you examine data from the U.S. Census Bureau’s Household Pulse Survey. The survey was designed to provide near real-time data on how the pandemic was affecting people’s lives but now provides an interesting lens into how consumers are behaving as inflation pressures grow.
The survey asks consumers if they’ve had trouble paying their usual household expenses in the last seven days and breaks their responses out by income levels. Since last fall, when inflation jumped to over 6 percent, every single income group — including those earning over $200,000 — is reporting more difficulty with paying bills now than they were before.
What’s interesting is that the biggest increase in difficulty paying bills is not seen in the lowest income brackets. While the vast majority of households with income less than $50,000 are having trouble paying bills, only 8 percent more are reporting difficulty now they were seven months ago.
On the other hand, households earning over $50,000 have seen a dramatic increase in their difficulty in paying bills. Over 30 percent more households earning between $50,000 and $100,000 are reporting difficulty now than seven months ago. For households earning between $100,000 and $150,000, there has been a 47 percent increase in difficulty paying bills, and for households earning between $150,000 and $200,000, a whopping 66 percent more are reporting difficulty paying bills today than seven months ago.
The data also shows that households are turning more and more to their savings and borrowing to meet current spending needs. Consumers are using credit cards, loans and borrowing from friends and family to meet their expenses — and this behavior is increasing. Almost all income cohorts report that they are turning more to alternative forms of financing to meet their expenses than they were last year.
As inflation pressure ramps up, it’s beginning to impact a wider swath of U.S. households. While almost 60 percent of households earning less than $25,000 are currently reporting difficulty paying usual household expenses, higher earning households are quickly catching up. That will become even more problematic as the Fed continues to raise rates and increases the cost of debt that Americans are relying on to pay their bills.
It’s imperative that the government acts as soon as possible to address this situation. One of the most effective things it can do right now is remove the Chinese tariff taxes. Studies show that removing tariffs could save households as much as $1,200 a year. Those savings would go a long way toward defraying the impact of higher prices and easing the burden on the U.S. consumer.