U-M Survey: Consumer Caution Increasing as Inflation Carries On

According to a new report from the University of Michigan in Ann Arbor’s Department of Social Research, consumers are scaling back spending habits and changing attitudes toward saving and borrowing after a year-and-a-half of high inflationary pressures.
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A University of Michigan report shows consumer activity trending towards penny-pinching after a year-and-a-half of high inflation. // Stock Photo

According to a new report from the University of Michigan in Ann Arbor’s Department of Social Research, consumers are scaling back spending habits and changing attitudes toward saving and borrowing after a year-and-a-half on high inflationary pressures.

Consumers reported an all-time low of sentiment this summer. By October 2022, year-ahead inflation expectations were 5 percent and long-run expectations were 2.9 percent. Both measures are considerably elevated and remain above the Federal Reserve’s target of 2 percent inflation, according to Joanne Hsu, director of the surveys at the U-M Institute for Social Research.

As part of the report, the surveys asked consumers about current and future changes in their attitudes and spending in August, September, and October of this year.

“Throughout 2022, consumers have expressed how inflation has eroded their living standards, closely tracking the proliferation of negative news they hear about inflation,” says Hsu. “We can now see the effects on behavior as well: a majority of consumers have adjusted to their expectation of continued inflation by adjusting their spending.”

Some questions asked of consumers were also collected in 1979 and 1981, providing some historical context, though by then consumers had already adjusted to a decade of high inflation, Hsu said.

Specifically, the report found about 60 percent of consumers have already scaled back their spending in response to inflation, and even more consumers plan spending cuts in the year ahead.

Overall, about 8 percent of consumers reported that they had stopped buying things with particularly large price increases over the past year, and an additional 51 percent reported cutting back on their spending.

The spending categories cut back by the most consumers in the past year cover both necessities and discretionary purchases, including food/groceries (reported by 19 percent of households), household items including durables (13 percent), and eating out/entertainment (12 percent).

Less than 40 percent of consumers reported no change in their spending habits, compared with 61 percent in 1981. Lower-income consumers were more likely to adjust their spending than those with higher incomes.

Consumers who scale back their spending have lower sentiment and higher inflation expectations. They are more reluctant to borrow for major purchases than to dissave, which suggests that consumers may pull back their spending even more as they draw down their savings.

During the 1970s, the appeal of savings and the distaste for debt were both influenced by the inflationary environment. The left panel of the table below reports respondents’ willingness and readiness to draw on savings or incur new debt for major purchases.

Currently, 20 percent of consumers who report having savings believe dissaving for this purpose is reasonable; this reading is well below the 1979 and 1981 values. An even lower share of consumers is willing to increase borrowing to make such purchases.

Overall, those who are willing to dissave or borrow have considerably higher sentiment and lower short-run inflation expectations than those who are unwilling, again showing the importance of expectations on consumer attitudes toward spending.

Advance buying motives — a component of inflationary psychology in which consumers make large purchases to avoid price increases in the future — do not yet appear to be widespread but are favored by a sizable minority of consumers and remain a risk for the future.

Consumers report more awareness of news on inflation than in the 1970s, which may influence attitudes.

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