Living in inflation’s wake

Persisting concern could be driven by a stubborn inflation rate that has yet to hit the Fed’s 2% target.¹ But the bigger reason is probably a lot simpler. Consumers’ needs and wants became more expensive very quickly.

Since early 2021, Deloitte’s financial well-being index has generally moved inversely with inflation (figure 2). The index, which captures changes across six dimensions of financial health,² hit a four-year low (70.7) in June 2022, the month inflation peaked at 9.1%.

As inflation eased, Americans’ sense of financial well-being improved significantly. Six consecutive months of dropping rates coincided with a 28.3-point increase in the index by the end of the year. Over that time period, the percentage of Americans concerned about their level of savings fell from 62% to 44%.³ The amount concerned about making upcoming payments fell from 32% to 20%.⁴ Those delaying large purchases fell from 56% to 42%.⁵

Yet, the initial boost in financial well-being appears to have run its course. Financial well-being sentiment plateaued over the past year, remaining nearly unchanged between January 2023 (99.8) and January 2024 (99.0). While easing inflation provided a quick hit of optimism, Americans likely still need time to adjust to prices that are nearly 20% higher than three years ago.⁶

Evidence of inflation’s lasting grip doesn’t stop with financial well-being. It’s also apparent in how consumers think about spending—both how much and where.

Peak inflation in 2022 coincides with the start of a year-long drop in consumer spending intentions (or the amount consumers expect to spend in the month ahead). While maintaining a slight uptrend since June 2023, total spending intentions are still yet to fully recover (figure 3).

Trends vary significantly by category, potentially offering insight into how consumers continue to reshape their wallets to navigate the price pressure. Perhaps unsurprisingly, spending intentions for housing remain the most elevated. Rising costs in categories like housing are often more difficult for people to evade.

At the same time, similar dynamics aren’t playing out in other essential categories. Like housing, food has become more expensive. But spending intentions for groceries have generally remained flat, strongly suggesting consumers likely continue to employ cost-saving strategies at the grocery store. Throughout 2023, Deloitte’s food frugality index has echoed the trend, measuring strong increases in the percentage of Americans leaning on lower-cost ingredients, sticking to essentials, and reducing food waste.

Then there are categories that consumers lean on to help offset rising costs elsewhere—and there are many. Spending intentions for discretionary categories like restaurants and recreation and entertainment are still much weaker than they were in 2022. But strong pullbacks have also been evident in categories some might assume to be less discretionary, such as clothing and personal care.

And amid the balancing act, the COVID-19 pandemic may still have a lingering influence. Strong pandemic categories like home furnishings continue to see some of the steepest cuts. Meanwhile, spending intentions for leisure travel remain exceptionally strong.⁷

Regardless of household income, consumer companies’ stiffest competition for incremental dollars likely comes from banks, brokers, hotels, and airlines. The most significant difference in spending between individuals with a strong versus weak sense of financial well-being is their ability to save (figure 5). If financial well-being improves, businesses may see a consumer focus on repadding depleted savings, particularly since the US personal savings rate has been traveling well below the long-term average for two years.¹⁰

Regarding leisure travel, lower- and middle-income Americans’ spending intentions jump between 50% and 70% when financial well-being improves from low to average or from average to strong (figure 5).

Changes in financial well-being seem to have less influence on higher-income households. For higher earners, a weaker sense of financial well-being can often translate to spending cutbacks. For lower earners, however, weakened finances often mean not spending. As a result, when financial well-being improves, the impact is amplified in lower-income households.¹¹

A similar relationship between inflation and financial well-being is likely playing out globally. But the strength of the relationship and timing is likely a country-specific story. The ebb and flow of financial well-being and the timing of inflation’s peak vary significantly across the world’s largest economies (figure 5). In countries such as Germany, Canada, and the United Kingdom, the inflection points between peak inflation and financial well-being seem to coincide. The trends are less clear in other countries, such as Italy and France.

That said, consumer psychology and the relationship between improved financial well-being and spending intention is likely universal.

Ultimately, as the sting of inflation wanes, consumers could be due for a boost in financial well-being. This could catalyze spending confidence to break free from a long-term plateau. The consumer companies that benefit most might best position themselves in the goods and services categories consumers are more likely to turn to when that day comes.