Pricey food is first to go
With the cost of living set to outpace the average income this year, Steven Fazzari, professor of economics at Washington University in St. Louis, says Americans will need to cut back on discretionary purchases like entertainment, travel and eating out to focus on necessities.
“This kind of adjustment is always necessary when households face a financial squeeze, but it’s more severe in the current circumstances because price increases have been concentrated especially for necessary items like gas, groceries and rent,” says Fazzari.
Food in particular has been a focus for American households hoping to cut their costs. Food prices rose 1.1% in July, which brought their yearly inflation rate up to 10.9%.
Americans are already starting to make changes to adapt to increasingly steep prices. According to a survey by Morning Consult, more than 80% of consumers say they’re eating out less and about 75% are going to bars less.
And while they’re cooking more at home instead, they’re still finding ways to make that cheaper too, with 72% purchasing less meat and 68% buying less alcohol.
That being said, Fazzari believes some lingering effects of the pandemic will save these sectors from complete decimation.
“Many firms in these sectors are facing supply constraints from the pandemic disruptions, so cut backs may seem less severe than in other periods when consumer spending had declined,” he says.
Travel is next on the list
Ori Heffetz, an associate professor of economics at Cornell University, adds that when consumers are forced to cut back, it’s often not a question of what people “feel they can cut back on” rather where they “feel they get the most bang for the cut-back buck.”
With energy prices soaring, that means industries like travel that are energy-intensive will be the next to go.
The price of plane tickets rose nearly 19% between March and April — the largest month-over-month increase for airfares on record, according to data from the Bureau of Labor Statistics. And by the end of July, they were up 27.7% from last year.
We’re already seeing the effects of those surging prices. A recent report from Destination Analysts shows that the number of Americans who feel now is a good time to spend money on leisure travel is on the decline.
While 39.2% expressed that it was “good or very good time” to spend on a vacation in the first quarter of the year, that number dropped to 32.6% in Q2. And half of the respondents reported it was high costs that were holding them back from making travel plans.
Replacing older items will have to wait
When everything costs more, consumers tend to hold off on upgrading or replacing durable goods, like televisions and washers or dryers.
“When they feel squeezed, households not only postpone replacing things they don’t absolutely have to replace right now, they also cut back on whatever is perceived to be getting more expensive faster than, or relative to, other things,” says Heffetz.
A classic example of this would be driving an older car for another year instead of buying a new one — which wouldn’t be a terrible idea this summer, as supply shortages continue to push up the costs of both new and used cars.
Analysis from Kelley Blue Book shows new car prices were at a record high in July — with the average transaction price $5,126 more than in July 2021.
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Americans have already pivoted on gas usage
Gas prices have been sending Americans into a tizzy for months now. But it may not actually be as dire as it feels right now, says Fazzari.
“Perceptions of economic turmoil are heightened when the prices of things everyone buys go up dramatically. But these fears may be exaggerated.”
“Gas prices are scary, but they are already moderating and, if they stay elevated, people will adjust,” he adds.
While gas prices in the majority of the country in June surpassed the $5/gallon mark, before making a slight drop, data from the U.S. Energy Information Administration shows Americans have been changing their driving behaviors as a result. Gas sales dropped 5% in June compared to pre-pandemic levels and 2.6% from a year ago.
“There will likely be some slowing of consumption, but the problems do not look bad enough at this point to make a recession, especially a moderate to severe recession, a foregone conclusion,” Fazzari said.
It may all depend on the Fed
While higher prices can reduce consumer spending, which can help ease some of the pressure of inflation, Heffetz believes the onus depends on the Federal Reserve and their policies.
“The question is not whether the U.S. economy can survive reduced consumer spending,” Heffetz says. “I think here the question is whether the Fed can, by increasing interest rates, reduce demand in the economy — including consumer spending — enough to bring inflation back down.”
And of course, it also raises the question of how much pain that will cause consumers. Significant job losses could indicate the country is headed toward a recession — but only time will tell whether that’s inevitable or avoidable.
“Again, the big question is about policymaking at the Fed. It’s walking a tightrope,” says Heffetz.
“We’re all holding our breath.”
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