The shape of consumer spending

The rising cost of living is a likely driver of shifting spending intentions. Inflation has been high in the United States and the United Kingdom, hitting roughly 9% between May and June.¹

Consumer confidence appears a bit stronger in some countries, such as Japan, where inflation remains relatively low.² Compared to last September, Japanese consumers in June planned to allocate a slightly larger share of their monthly budgets toward categories like recreation and entertainment, restaurants, and leisure travel (figure 1). Over the same nine-month period, the Bank of Japan's Consumer Spending Index for Real Services jumped 10 points, from 88 to 98.³

The trends suggest that built-up pandemic demand is still winning the battle over saving in some countries. In Japan, the absence of spiking inflation is important to consider. At face value, it makes sense that consumers would feel more comfortable spending freely in a more price-stable environment—but the drivers behind spending are still murky. Consumers may still be reacting to global inflation more broadly, diverting more cash towards discretionary categories now with the expectation that prices could rise in the near future.

But there are also countries with high inflation, where spending intentions haven't changed much. In Germany, for example, inflation hit 8% in May—roughly on par with the United States and the United Kingdom.⁴ Discretionary spending intentions, however, have yet to show signs of budging (figure 1).

Globally, consumers appear to respond differently to strong inflation and the bleak economic outlook. Financial sentiment and key differences at the country level could offer some insight as to why.

Consumers’ financial footing

Even across the world's largest economies, consumers’ capacity to absorb financial pressures like inflation and recession likely varies.

Financial sentiment among Americans, for example, has been flashing warning signals for over a year. In May 2021, the national Personal Savings Rate stood near record highs.⁵ At that time, only 33% of Americans expressed concern about their level of savings (figure 2).

But rising inflation quickly exposed a shaky financial footing. As rates climbed, in tandem with sunsetting pandemic relief programs, savings concerns followed suit. Nearly two-thirds (61%) of Americans now express concerns about their savings—with the Personal Savings Rate sitting at only 5%. Savings concern among consumers in the United Kingdom is following a similar trend.

More recently, concerns about credit card debt are rising among Americans (48%).⁶ And some trends, such as the number of lower-income Americans struggling to make upcoming payments, have been steadily increasing since the pandemic’s early days.⁷

In stark contrast, financial sentiment in Germany appears considerably stronger. Only 32% of German consumers express savings concern—a figure that’s remained steady for nearly two years. Additionally, fewer consumers in Germany cite concerns around credit card debt (32%).⁸ But compared to the United States, credit card use is generally less prevalent in Germany.

Local environment

Beyond financial well-being, key differences at the country level could also be influencing consumers’ intention to splurge or save:

• Nature of inflation: Reactions to inflation are likely being driven by the nature of inflation itself. In Germany, where spending intentions remain relatively steady, inflation is exclusively driven by higher energy prices, including natural gas and heating oil, as well as food prices.⁹ Prices, however, have remained stable (or even fallen) in a few categories outside of energy and food—including passenger transportation services, telecom services, and electronics.¹⁰ In contrast, inflation in the United States has generally been universal. Throughout the pandemic, expansive fiscal policies drove a consumer spending boom on goods that helped nurture inflation. As a result, nearly all categories in the United States Consumer Price index have increased over the past year.¹¹
• Hot housing: Housing represents the most significant consumer spending category by far. In the United States, where spending intentions for discretionary categories weakened the most, median home prices have increased 33% in the past two years.¹² Housing prices have increased in the United Kingdom (20%) and Germany (17%) since 2020—but the jumps haven't been as strong.¹³
• Social safety nets: Socialized programs are also an important factor to consider. Over the next month, German consumers only plan to allocate 6% of their monthly budget to health care and education. Americans plan to spend closer to 10%. Additionally, recent drops in the cost of some passenger transportation services in Germany are driven by government subsidies. Programs like socialized health care and education are likely important lifelines for consumers who use these services—particularly during economic downturns.

The shape of consumer industry

Pandemic-influenced consumer patterns rendered many historic demand models obsolete.

Persisting inflation; rising interest rates; ongoing supply-chain disruption; and slowing economic growth—these new pressures will continue to shape already altered consumer demand and preferences.

Complicating factors will be that demand and preferences will evolve unevenly and at different rates across the globe. Understanding consumers’ financial well-being may become key to regional and local market trends.

For example, income bifurcation has shaped consumer spending in the United States for quite some time. In turn, it has shaped strategies and business models. For example, revenue growth among price-based and premier retailers outpaced more balanced retailers for years.¹⁴ Airlines have been busy segmenting their cabins to create a broader mix of high- and lower-priced fares.

Just as the pandemic challenged conventional wisdom, consumer companies should expect the confluence of economic pressures to challenge the typical recession playbook equally. Consumer companies will likely want to include consumer financial well-being and increasingly granular consumer behavioral data in their models to remain agile and ahead of a dynamically evolving environment.