Shrinking Real Wages and Our Consumer Inflation Fighters Model
Wage growth is being sapped by inflation pressures, so where can consumers turn to increase their buying power?
The April prints for the Consumer Price Index and the Producer Price Index were a surprising revelation to the stock market, economists, and investors this past week. Even though both metrics ticked lower compared to March, the reported headline figures as well as those for core inflation that excludes food and energy (don’t get us started on the rationale behind this given the impact on consumer paychecks) were hotter than expected. For those of us that digested the recent string of monthly PMI data from S&P Global as well that from monthly Institute of Supply Management, the April CPI and PPI prints were not that surprising nor are the prospects for inflation as reported by those metrics to remain at elevated levels.
What this means is real consumer wages will remain under pressure. We say “remain” because data from the Bureau of Labor Statistics revealed real compensation, which is adjusted for inflation, fell 3.7% for all workers through the trailing 12-month period that ended in March. For context, that's worse than the 2.9% drop seen through 2021 and the biggest one-year decline in two decades. Meanwhile, data from LendingClub and PYMNTS shows that more than 60% of U.S. households back to living paycheck to paycheck.
Putting these factors together, we see a headwind for consumer spending, a key economic engine for the U.S. as well as the likelihood that consumers will continue to spend on non-discretionary items such as food, paper products, and personal care products that tend to be more inelastic in nature. As those prices have ticked higher, particularly for brand name products, we’re likely to see consumers trade down to private label brands as well as look to either buy in bulk or shift their buying to retailers that allow buyers to stretch the disposable spending dollars they do have.
We’re already seeing signs of this happening.
“European consumers are hunting for bargains, buying cheaper clothes as inflation crimps the budgets of many households, according to Zalando SE.”
“Europe’s biggest online clothing retailer said it’s seeing the first cracks in consumer spending as rising expenses lead shoppers to choose entry prices over mid-market clothing. More well-heeled shoppers are still opting for pricier clothes, however.”
“U.K. clothing retailer Joules warned this week its profit could be hit as customers have become highly dependent on promotions and demand for full-price items has reduced.”
Europeans Are Dressing Down as Inflation Bites, Zalando Says
As inflation pressures endure, we see consumers tilting to those retailers contained in Tematica’s Consumer Inflation Fighters model.
And there are likely some that will dismiss this shift as something that will eventually end, the data has something else to say:
For Americans between ages 55 and 64, the median retirement savings was just over $107,000, according to a 2017 report from the Government Accountability Office (GAO). The GAO notes that this amount, which may sound significant, would only translate into a $310 monthly payment, and only if it was invested in an inflation-protected annuity.
According to the Social Security Administration, a healthy 65-year-old woman has a very good chance of living to age 86, and a 65-year-old man has a good chance of reaching age 84. Older adults should save for a retirement that could last 20 years.
According to the U.S. Department of Health and Human Services, there is a 70% chance that an American age 65 or older will need long-term care at some point. The median cost per month for an assisted living facility is $4,051. Again, that’s per month.
This tells us there is a wider need for consumers to watch their dollars and cents, and that bodes well over the long-term for Tematica’s Consumer Inflation Fighters Model.