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Inflation’s Unpredictable Effects Mark Uncertainty for Retailers

“This is no free lunch” is one of those proverbs core to American culture and self-image, yet it seemed oddly common during the Fed’s wild dash to print money as COVID-19 raged to see efforts to downplay anxieties of impending, massive inflation. 

Like so many things during the worst of the pandemic, there was an element of desperation: an attitude of shutting one’s eyes and ears to the difficult choices—and consequences—that were collectively before us even as the Fed aggressively deployed quantitative easing (which critics note risks stagflation). 

While we now plainly see just how wildly inflation rose, those difficult choices—and opportunities to ignore them—remain. To assume that 7+% inflation rates are just going to pass over without continued consequences is just another kind of wishful thinking. 

The apparent excellent GDP growth and consumer spending in the prior quarter don’t tell the whole story, as evidenced by headline after headline noting this growth ‘despite inflation’

While inflation can in some circumstances appear to aid growth (as seemingly observed recently in the UK, possibly due to certain behavioral economic factors), without appropriate adjustments, short-and-long-term Consumer Price Index (CPI) increases spell trouble for retailers.

What is going on? It isn’t crystal clear to any one expert. However, what is increasingly clear is that it has become intolerably expensive to live for millions upon millions of Americans. To deny that this will have real impacts on retailers is an unearned assumption. 


Inflation’s fury of blows hits average consumers the hardest

Inflation is one of the most complex economic phenomena, with implications stretching beyond the financial realm into the psychology of economic actors; it follows that the uncertainties which come with such complexity are exacerbated by higher inflation rates.   

Between January and May of 2021, inflation rose an eye-watering 4%; it then rose another 2.2% to a historic 7.5% inflation rate which—while slowing down from the high of March-April’s single-month 1.6% increase—doesn’t yetseem poised to stop

Eyes are currently on the Fed with the questions surrounding interest rate hikes being ‘when’ (specifically, ‘how many and how much’) rather than ‘if.’ 

The view that things will ‘even out’ due to subsequent wage increases (including potential effects of nascent labor movements in the US) isn’t bearing out as wage increases continue to be distributed unevenly with ‘not enough’ of an increase for the already struggling.

Additionally, prices on nearly every major good have risen considerably according to Pew Research: “The Consumer Price Index…increased 7.0% from December 2020 to December 2021—its highest rate in nearly 40 years… Fuel oil is up 41%… Prices for used cars and trucks…have soared 37.3%.” 

Furthermore, outside the US, global food prices have shot up a staggering 33%: “Based on real prices, it is currently harder to buy food on the international market than in almost every other year since UN record-keeping began in 1961.”

If inflation can be optimistically imagined as a force that increases consumers’ slice of the pie via corresponding wage increases and decreasing prior debt values (barring compensating interest rates), the CPI increases we are seeing ultimately leave the average consumer with a smaller piece than ever as wages fail to keep up (as is historically typical), especially when paired with lackluster responses from Washington to shore up the invariable impacts. 

In short, “inflation is toughest on the poorest people in society,” people who are core consumers.


Making sense of the insensible: recent growth and cause for caution going forward

Yet, recent retail growth has been remarkable. Writes J. Craig Shearman for the National Retail Foundation (citing Census data from the Economic Indicators Division, Retail Indicator Branch), “January’s results follow a 14.1 percent year-over-year increase in retail sales…Both the rate of growth and the $886.7 billion spent during the holidays were new records despite the pandemic and other factors.”  

Similarly, imports are at historic highs as consumer spending continues, making a slowdown in cargo growth actually welcome as supply chains continue to work out how to navigate sky-high volumes.  

What does this mean? Again, the waters remain muddy—time will tell. A major factor is certainly the huge consumer shift toward techincluding in B2B—during the pandemic (as well as stimulus spending going straight to retailers’ pockets). 

‘Inflationary psychology’—a state of mind that leads consumers to spend more quickly than they otherwise would in the belief that prices are rising—is another potential player, especially at historic rates.

While the news is, apparently, far from all bad for retailers, Katherine Cullen for the NRF notes some of the specific potential ongoing consequences: “[Inflation] will likely stay on consumers’ radar in 2022…searches for ‘low budget’ are up 100 percent year-over-year…[while] 29 percent of consumers plan to shop closer to home due to fluctuating gas prices.”

Furthermore, while it may be true that said energy prices are volatile, that doesn’t mean a sudden reduction in pump prices would resolve issues either: “When you strip out volatile food and energy prices…Both [CPI and Personal Consumption Expenditures] are [still] well above the Fed’s 2% target,” writes Taylor Tepper for Forbes. Global economic rebound remains threatened by the trifecta of supply chain blockages, energy prices, and inflation. 

It behooves retailers to exercise caution and planning moving forward. Keep in mind that while short-term gains may see the numbers going up (for now), the numbers are also going up—quite relentlessly—for the consumers doing the buying