Inflation Has Consumers Rethinking Spending Habits

“Consumers have often relied on their savings to accumulate during the pandemic to fuel their sustained demand. However, today, savings rates are dwindling, and with the consistently high cost of gas and oil – influencing the price of everything from tomatoes to t-shirts – consumers have to make specific choices in how they use their limited funds. The industry that will likely see the most significant short-term impact is retail,” said Courtney Hilbert, Senior Director, Analytics at Merkle.

Hilbert discusses the impact of inflation on consumers and the business industry post-pandemic, and how new data visualisation trends and how it can help marketers in their role.

Excerpts from the interview

How have brands been impacted by inflation?

Historically, the inflation rate has been ~2%, with household incomes growing at a similar rate – neutralising the overall influence of inflation on customer decisioning. In the last few decades, outside of the base rate, inflationary pressures have either been industry specific (eg. 25% tariff on cotton starting in 2018, oil price increases post-September 11th, 2001) or short-lived.

In 2023, the high inflation rate has been driven by the confluence of supply chain delays, staffing shortages, increased gas/oil prices, and sustained international conflict, impacting nearly all goods and service industries. The cross-industry impact, coupled with the sustained pressures of real wages not growing at a pace of inflation (average HHI was up +5.1 per cent in June compared to a +9.1% CPI in June), makes this point in time critical for brands to navigate inflation differently.

How does the inflation resilience board help make impactful marketing decisions?

Not all consumers are being impacted by inflation similarly. The Inflation Resilience Dashboard gives brands the ability to understand where the pressures of inflation are more acutely felt at a hyperlocal level to understand business performance better and personalise marketing efforts, product placement, and pricing initiatives.

What kind of data fuels the algorithm; tell us how it works?

The Inflation Resilience Dashboard is fuelled by the Inflation Resilience Measure (IRM). The IRM leverages average HHI and COLA over the Consumer Price Index. As inflation had been on a steady trajectory pre-pandemic, the current monthly IRM is compared to the pre-pandemic IRM to determine consumers’ spending capacity and ability to withstand inflation at a community level. A positive trending IRM indicates communities with greater wallet elasticity. A negative IRM shows communities with less buying power are likely to be more negatively impacted by inflation. The IRM has acted as an indicator of response to acquisition efforts in communities with a positive trend; conversely, those with a negative trend have shown low to no reaction to the same efforts.

How is inflation influencing consumer behaviors?

Consumers are still spending in the short term on travel or dining because the pandemic restricted consumer demand. That spending is keeping the inflation levels higher.

Consumers have often relied on their savings to accumulate during the pandemic to fuel their sustained demand. However, today, savings rates are dwindling, and with the consistently high cost of gas and oil – influencing the price of everything from tomatoes to t-shirts – consumers have to make specific choices in how they use their limited funds.

The industry that will likely see the most significant short-term impact is retail. As consumers shift more of their budget to pay for everyday needs, like groceries, gas to get to work, and increased utilities, they will have little choice but to extend the window when making non-essential purchases like a new dress or a tennis racquet. Retail had a +1% MTM increase in June, under the average MTM growth of inflation of +1.3%, likely pointing to contracted traffic with higher average tickets offsetting the decline in conversion.

Which industries are most affected by this data?

All industries are being affected by inflation. As consumers are likely to cut non-essentials first, it is anticipated that retailers will potentially experience contraction first. But the sting of inflation is going to expand to a variety of industries, including:

Financial services – with consumers looking for optimal interest rates for credit cards

Insurance – with consumers shopping for a better home, auto, and life rates

Entertainment and media – with consumers contracting streaming services or switching platforms

Inflation causes consumers to think about how they are utilising the money in their wallets as the capacity shrinks. Leveraging the IRM data, industries can identify communities less negatively impacted by inflation which might have more excellent elasticity of wallet and therefore have a higher potential to respond to retention offers. Conversely, communities with lower IRM scores tend to be more price sensitive and may be shopping around for less expensive options for their current goods and services.

What are the new data visualisation trends and how can it help marketers in their role?

 Data visualisation has been an excellent tool for marketers to quickly assess the state of the business and diagnose areas of opportunity. Within the Inflation Resilience Dashboard specifically, marketers can leverage the mechanism for identifying areas of the country with greater or lesser opportunity for a new campaign or product for media targeting, analysis, and insights. It helps drive next-step actions and enlighten brand leaders on the “why” behind what is happening in their industry and specific business.