- Daily Zen
Consumer behavior during inflation skews the balance between supply and demand.
In May, Inflation in the US rose as high as 8.6%, one of the highest in the world and a four-decade high for the country. On June 14, The Biden administration tried to reassure people that they are working to tackle the worst crisis they have seen in years. But unless concrete measures are put in place, the effects of inflation on consumers will affect the household budgets and spending.
In the past few weeks, the prices of food and gas have skyrocketed in the US. The Biden administration admitted they are aware of the impact of inflation on consumer spending and that it is “sapping the strength of a lot of families.” The recent Russian invasion has only served to exacerbate matters.
Tackling inflation will not be easy. It has been compounded by the rising food prices, Russia’s invasion, and supply chain disruptions. Experts mention that for the market to stabilize, there must first be a balance between demand and supply.
The Consumer Price Index for All Urban Consumers (CPI-U) increased 8.6% over the last 12 months. CPI reflects the changes in prices and spending patterns of consumers. A 8.6% increase shows that high costs have squeezed household budgets, barely leaving room for discretionary spending.
The Federal Reserve changes interest rates to control inflation. When interest rates are high, it becomes difficult to borrow money for projects, which reduces spending by business as they tighten their purse strings. This in turn affects their net income and stock price. A high inflation literally translates to less spending money. Ryan Detrick, chief market strategist at LPL Financial, told Reuters that “today, the inflation data was disappointing. Many hopes for a peak are now dashed. The fears over inflation and the potential impact of profits in Corporate America are adding to the worries for investors here.” Stock and bonds have also fallen in value making it difficult to invest. A risk-averse Wall Street has been struggling to stand on its feet as inflation wipes out millions in value. The effects of inflation on consumers are multi-old and change everything from spending habits to investments.
Most experts expected inflation to decline after hitting a high of 8.5% but it is yet to happen. Rising prices also affect the psyche, forcing customers to make emotional decisions over rational ones. George Loewenstein, professor of economics and psychology at Carnegie Mellon University, told NBC News that in their effort to cut losses, customers will often try to stock up on durable goods instead of saving money. Experts point to these effects of inflation on customers as people stockpile daily goods, from toilet paper to baby formula. Shoppers also redirect money from their budgets. Discretionary spending like travel and eating out is reduced as now they prefer buying things that are necessary and unavoidable. They are driven by the fear that prices will increase and that in the near future there might not be enough for them. As supply chains have been disrupted, consumers will continue to buy things, increasing demand disproportionately. With high demand and less supply, customers unwittingly drive up inflation and the self-reinforcing cycle makes things worse. The only way to combat this is to help customers understand their spending behavior and how it affects the economy. A cultural and behavioral shift is required to lessen the impact of inflation of consumer spending.
The Federal Reserve has tried to keep US inflation in check by controlling interest rate hikes. Last week, experts looked for signs that inflation had peaked, but it was not to be. Economists, however, believe that a tighter monetary policy will not help much as prices of commodities continue to rise globally.