Consumers Have Reached A Breaking Point After Losing $1 Trillion To Inflation

Ever since retail opened up after the pandemic, the National Retail Federation has gushed over the resiliency of the U.S. economy and the American consumer.

In a recent CNBC interview, NRF president and CEO Matthew Shay reported January retail sales were up 4.8% over last year, highlighting: “We have very resilient consumers and people are out their spending. In spite of what they know and concerns regarding inflation, they’re finding a way to get out and spend.”

Resilient may be one way to describe American consumers, but perhaps that’s because they have no choice. They need to keep food on the table, heat their homes, and get back and forth to work, all of which costs significantly more than a few years ago.

Tellingly, Shay said Americans keep spending “in spite of what they know” – a Freudian slip? But what they probably don’t know is that inflation alone cost them more than $1 trillion last year, according to Jitender Miglani, senior forecast analyst at Forrester.

Actually, the number is $1.1 trillion or $1,100,000,000,000, but who’s counting?

One trillion dollars is an unfathomable number to translate into real terms. It is equal to a thousand billion or a million times a million. A stack of a trillion dollar bills would stretch nearly 68,000 miles into space, or if laid end-to-end they’d reach further than the distance from the earth to the sun. And it takes nearly 32,000 years to count down one trillion seconds.

Measuring How Americans Spend

Forrester’s Miglani created a seemingly simple Excel dashboard to arrive at the $1.1 trillion figure. He compared what economists call the “nominal” personal consumption expenditure as reported by the Bureau of Economic Analysis, e.g. NIPA Table 2.4.5U, to the “real” personal consumption expenditure based upon 2012 chained dollars, which corrects for inflation, e.g. NIPA Table 2.4.6U, to calculate the extra amount spent attributable to price increases alone.

And because the BEA provides detailed line-by-line personal consumption expenditure for over 300 different product and service categories, Miglani could calculate the cost of inflation for each line item.

Unfortunately, for us mere mortals, economists’ choice of terms “nominal” versus “real” is confusing because people don’t actually see or spend their “real” 2012 chained dollars. It’s the “nominal” ones that come out of our bank accounts, and that retailers measure quarter-to-quarter.

So the figures below are expressed in “nominal” terms, but they are all too real when it comes to Americans’ finances.

Breaking It Down

Overall services spending was the most impacted by inflation last year, totaling some $636 billion of additional expenditures for things like housing, utilities, food services, accommodations, health care, transportation and recreation.

In the business of consumer goods that retailers rely upon, Americans paid $468 billion extra due to inflation. That pretty much accounts for nearly 90% of the $532 billion growth in retail, excluding food services, from 2021 to 2022, which rose from $6.6 trillion to $7.1 trillion.

Digging deeper into the data, non-durable goods, like food, clothing, gasoline, household and personal care supplies  – everyday consumable necessities that Americans purchase on an on-going basis – were most profoundly impacted by inflation, to the tune of $335 billion.

Virtually all and then some of the extra expenditure in non-durables is accounted for by inflation. In other words, the reported “nominal” PCE increase in spending last year was not demand, but price driven. And non-durables is the category that accounts for the largest share of consumer goods spending, $3.8 trillion of the total $5.9 trillion.

On the other hand, durable goods were less impacted by inflation, eating up an additional $133 billion in spending. As a group, durable goods, defined as goods made to last at least three years, are more discretionary in nature and include automobiles, home furnishings, appliances, jewelry and watches and recreational goods.

But just like non-durables, inflation accounted for all and more of the growth in durables spending, from $2.1 trillion in 2021 to $2.2 trillion in 2022.

Forrester’s Miglani points out that not all increases in every line item in PCE are attributed to inflation. For example, televisions, video equipment, computers, recreational goods and rec vehicles experienced price declines, so spending growth in these selective categories was driven by volume, not inflation.

But overall, he shared, “By comparing ‘nominal’ to ‘real’ spending, we can measure volume-driven growth compared with inflation-driven increases. Overall, the numbers the retail industry is reporting right now is almost completely inflation driven.”

Net/Net: Inflation is hurting American consumers and the retailers that depend upon their spending power far more than anyone knew. Whether inflation goes up, down or sideways, it has eaten a big hole in American consumers’ pockets with little to show for it.

Consumer Burn Out

And there are other troubling signs of consumer burnout. The personal savings rate ended the year at about half of the 8.8% it averaged in 2019 and household debt was up 2.4% in the fourth quarter, some $2.75 trillion higher than at the end of 2019.

Credit card balances alone increased $61 billion to $986 billion, in easy-hitting distance of $1 trillion and well over the pre-pandemic high of $927 billion.

“Although historically low unemployment has kept consumer’s financial footing generally strong, stubbornly high prices and climbing interests rates may be testing some borrowers’ ability to repay their debts,” Wilbert van der Klaauw, economic research advisor at the Federal Reserve Bank of New York said in a statement.

Reading The Tea Leaves

All of which leads one to ask whether the “glass-is-half full” economic forecasts coming out of some quarters are realistic or worst?

Ryan Severino, JLL chief economist and adjunct professor of finance and economics at Columbia University, shared with me that given the conflicting data, it is hard to get a true read on the situation.

“We are dealing with an environment that’s more complicated in ways that are different than ever before,” he said. “We are dealing with the aftershocks of the pandemic shutdowns, ongoing disruption to the supply chain and the ramifications of record fiscal stimulus.”

“These are unique factors that are combining together that make the current situation more challenging and complicated than in some other alternate universe where we didn’t have a pandemic,” he added.

As effective as economic models are in predicting the economy in normal times under normal conditions, this time is anything but normal.

“We have to ask whether the models we are using are appropriate to handle this environment and are we making the right adjustments? As a group, economists are doing the best job they can, but then, we haven’t been academically trained or experienced anything like this in the last half century, if ever,” he added.

And while there are pockets of secure consumers that can keep spending come what may, the everyday man or woman on the street is feeling the screws tighten on their spending.  

Consumers face an unsustainable situation with their spending and retailers must prepare for what’s coming next.

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