After $1 Trillion Lost To Inflation, Consumers' Resilience Has Reached The Breaking Point
S E E D E D C O N T E N T
Have American consumers reached burn out?
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? The NRF did not respond to Forbes' request for comment.
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, JLLJLL 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.
Speaker, author, and market researcher Pamela N. Danziger is internationally recognized for her expertise on the world's most influential consumers: the American Affluent. She founded research firm Unity Marketing in 1992 and is a principal in The American Marketing Group consultancy.
She received the Global Luxury Award for top luxury industry achievers presented at the Global Luxury Forum in 2007 and was named to Luxury Daily's Luxury Women to Watch in 2013. She is a contributing columnist to The Robin Report and a senior contributor on Forbes.com.
Prolific writer and blogger, she's authored eleven books, including Meet the HENRYs: The Millennials that Matter Most to Luxury Brands and her upcoming book with co-author Ken Rohl, The Corporateneur Plan: Your Roadmap from Mid-Career Professional to Entrepreneur.
Pam holds a B.A. in English Literature from Pennsylvania State University and an M.L.S. from the University of Maryland.
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The Biden economy.
Please explain this from your article and how Biden is responsible:
Kind of makes it sound like we are in uncharted territory. Also, let's not forget about the Fed raising interest rates to slow this down (and causing more bite in the American purse).
Thank God for the Fed. Raising rates is the main thing keeping inflation at it’s high but single digit level. There is little doubt we’d be in double digit inflation had Powell not been raising rates aggressively. That is well accepted by most unbiased economists.
Biden is president and therefore owns the economy he presides over. No more blaming Trump or giving Obama credit for Trumps economy. I know it’s difficult for some partisans to admit that but there you go.
That said Biden biggest problem is he keeps spending. Ironically the Inflation Reduction Act increased inflationary pressures via new taxes that work their way down to higher costs for consumers.
He also has embraced big labor, raising wages and therefore increasing costs to all Americans to cover it. He’s pandered to his base significantly increasing cash outlays for things like food stamps. Lost revenue by pushing programs like student loan forgiveness.
Lastly he’s increased consumer cost with policy. Energy cost alone have increased significantly largely because of his energy unfriendly policies. I could go on but I’m sure it would fall on deaf ears.
Honestly, I find it ridiculous how hard people defend this guy when they hammered on Trumps economy as someone else’s doing. Too many folks out there trying to have their cake and eat it to.
Here is a concept. My minor was a BA was in economics, so I do get the concepts of what this article is about. I tend not to blame presidents in office, but rather the ones that left, since economic trends take years to set up.
This is a particularly odd case, since we had a pandemic and we had a worldwide shutdown, as your article showed us. This is not on Trump or Biden. It is just what it is.
What new taxes? Be specific.
And yes labor wages has gone up. Do you know what has also gone up? Profits to big industry.
Please show me that people are A. getting more food stamps and B. That they are people who vote for him.
There we agree.
It has had some effect, but interest rates have had a much bigger one, as well as the cost of food, which has skyrocketed. And no need to get nasty with that deaf ears comment.
Honestly, I find that comment ridiculous, since I never mentioned Trump, or blamed him.
A great concept. Another coincidental concept is I minored in economics as well via my MBA. Although from what I’ve see here, I’m sure we are probably on opposite sides of Keynesian and Supply Side models.
Decisions made during Bidens tenure are his and his alone and while it is accepted that the Pandemic put us in new economic territory, it is also accepted that the net effect is equally unknown. So using the Pandemic as an excuse for a bad economy doesn’t work. Not by itself.
C’mon man, you know what taxes. Why don’t you just get to your point and tell us how you agree with a minimum 15% corporate tax for billion dollar plus corporations or higher taxes on folks making more than 400k.
Yes, I did know that. I also know neither by themself, is a bad thing. But when coupled with unprecedented federal spending and policy helping to increase the cost of consumer goods. One is much worse than the other related to increasing inflation.
Lol ....
A.)
B.) Most dogs don’t bite the hand that feeds them. Literally, but if you disagree with that. No point to discussing this any further.
Perrie, IMO your rules here tend to drive paranoia. That comment was not intended for you but if it had been and I had said so, it would probably get ticketed. So some people here try to write around that policy without using a name Not me, not in this case. If I want to call some out here. I usually do it and take the ticket. You know that because many of those tickets are given by you.
I didn’t say you did. This place is definitely making you paranoid
What did you learn about government spending driving inflation?
You would be wrong. Although there are good points in both Freidman and Keynes, I am a random walk person. Economics as a forecasting tool is a fool's folly since you can not predict human nature.
As for getting record SNAP, that has been going on since the pandemic, along with the PPP monies. As for your point B, you can't prove it, which was actually my point. People would have to know where their money is coming from, and it's been coming for a long time to say it is just one pres that did it.
I wanted to make sure this is what you were talking about. And I do agree with taxing this group of people, rather than taxing those who make under 400K. There is enough ways for them to hide their money. This is the least they can do with the stuff they can't hide legally.
As for your deaf ears comment, you were talking to me and me alone, so yes, I will stand by the fact that it was unnecessary. Paranoid, would be me imagining you saying that, yet one needs to only read up the thread to know that I am not wrong.
Excuse me? Is this not your comment to me found here: 1.1.3
So are those imaginary words, or do you just like calling me paranoid?
So you knew food stamp costs were going up precipitously but asked the question anyway?
I find that to be incredibly disingenuous. Same goes for the tactic you used asking about taxes. Please stop wasting my time and be more forthright.
Did I mention you?
No I did not, so I rest my case.
Wonder where that '1 trillion' went? Who gained it. And how did they do it? Is the money still here in the US? Or does it now 'rest' offshore?
Most money doesn't rest but remains in motion.
Did you bother to read the article?
It explains it very well.
There is more it doesn't say.
Where is the money?
Doesn’t matter where it went. Consumers only care where it’s spent and the article covers that in great detail.
Perhaps you are different and always ask where your money is going for all consumer goods you buy.
From the article
So the $1 trillion was what inflation has raised prices by.
Half the answer, nothing more. Corporate profits are the largest in history. I ask again. Where's the money?
No.
Obtuse and irrelevant.
Corporate profits are high because costs have gone up significantly. What caused costs to go up. Inflation. What caused inflation to go up. Out of control government spending.
You have no point related to the article. No cogent one anyway.
not really accurate.
Opinions do vary. My comment was not an opinion. It is fact.
Feel free to point out the errors if you don’t agree.
That doesnt even make any sense.
You are explaining it wrong.
If costs were high, profits would decrease.
Profits are high, since inflation is high, and therefore, they are making more money per widget.
Sometimes, but usually more related to government policies and regulations. Don't forget an increase in the money supply (like money printing during the Nixon years) which often leads to currency devaluation, which is another cause of inflation.
What also causes inflation is low supply and high demand.
And let's not forget the expectation of inflation will also drive up inflation.
I'm going to give you the benefit of the doubt and assume you have costs and prices mixed up.
Explain how goverment spending has increased the cost of pet food.
Also droughts. Floods. Industrial accidents. Many other things which government spending is without effect except to help to alleviate those problems for the people or businesses affected.
Government spending and regulation... combined with other measures that are not actually spending but have the same temporary effect (like loan deferments)... increased the amount of money in circulation faster than we increased the number of goods and services available for it to buy.
So prices on everything went up. On fertilizer, grain, meat, labor, packaging, fuel, retail overhead, advertising, insurance, accounting, electricity, and everything else.
None of that is special. It happens all the time and doesn't cause inflation.
The unusual incident was Covid, but the economy was already well on its way to recovery and probably mid-single digit inflation when the American Rescue Plan poured $2 trillion onto the fire. We then had the Inflation Reduction Act, which attempted to put out the fire with gasoline.
We then forgave several billion in student loans and deferred several hundred billion in student loan payments.
Biden spends money like every Millenial in America is his grandkid and he hasn't seen them in 10 years. Nobody who understands money can realistically claim he hasn't contributed to inflation.
Nothing you stated is factual.
Nah, I’m explaining it just fine.
Speaking as a person who ran a business for decades I’ll be happy to explain how this works. Not sure how your experience qualifies you to judge this but feel to share.
So, if a widget costs 10 dollars to make yesterday and is marked up 10%. Net profit is one dollar yesterday If cost go up, say a net percent of of 50%, cost goes to 15 dollars per unit. 15 dollars marked up the same 10% yields a net profit of $1.50 per widget. The higher profit speaks for itself.
I’m sure many of you here who have never run a business, never had to meet a payroll, never had to paid bills on time to insure your credit rating remains good to help keep costs down will say yeah, your mark up should go down but that’s not how it works. A 10% margin is peanuts compared to the liability most businesses are exposed to and is NOT gouging. Not by most definitions of “gouging” that is.
So profit goes up. Hopefully that explains what really happens in the real world.
See 2..3.13
Get back to me if you are still confused.
Please be specific.
Nah, I’m afraid I’m not the one this is confused here.
Not in the least. Feel to explain your comment.
Please be specific.
Your understanding of the concepts at play here are sophomoric at best. Please explain why his comment is not factual. Please be specific.
Otherwise stop trolling nonsense.
If the price of a haircut goes from 20 dollars to 30 dollars, a certain type of customer will stop getting their haircut as often , which could erase the "profit" increase. So the owner tells the barbers there will be no raise this year because business has gone down. Labor costs are cut to make up for the loss in business but keep the owner at the same profit level as before the price increase.
Then there are essentials which must be purchased , sometimes no matter what the price increase.
Of course it is.
It just disagrees with your partisanship so you don't want it to be.
First of all I grew up working in my parents' store, and now their real estate business so I understand real life applicatons.
This was never in dispute. What you said previously was:
To which I said a simple:
If .... certain type ...woulda, coulda, shoulda ..... none of your comment is relevant to what I said.
I can lead you to water but I can’t make you drink.
Not true, not necessarily.
If costs go up, businesses that want to remain in business adjust their price charged accordingly. Price being charged goes up. Just like is happening on virtually all consumer goods right now. In my example, profits would only go down if margins were decreased to keep the price charged the same. Say to something less than 10% markup I noted.
You can only do that so much before a business model like that fails. Especially when its already operating on tight single digit or low double digit margin.
Higher profits are easily explained in this manner.
Here is a solution, companies could stop gouging.
pay has risen, just ask any Democratic politician and they'll brag about it and everyone knows by now that inflation was just a temporary glitch.
what kind of cap on earnings for companies do you wish to see?
uh, I didn't write what you quoted.
were you trying to answer me?
Yes, I’d love to hear that magic number as well.
Same as the payroll tax
You are simply not making any sense.
I think maybe you got your articles mixed up or something.
What you quoted in post 4.1.1 doesn't appear in any of my posts, nor does it relate to my post at all, nor does 4.1.4 to 4.1.3.
Feel free to explain to us unwashed masses how that applies here.