Key insights
- A JD Power survey indicates over 85% of Americans have altered daily habits due to inflation, even before potential war-related price surges. Consumers are cutting discretionary spending (restaurants, apparel) and even essentials (thermostat settings, food). Reduced consumer spending, which drives the US economy, could hurt corporate profits and hiring, especially if geopolitical tensions exacerbate inflationary pressures. This may lead to a more cautious outlook for US equities.
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One-third of Americans have turned down their thermostat or bought less food, and more belt-tightening may be ahead.
More than 85% of consumers said in February that they had made changes to their daily life in response to inflation, according to a survey of 4,000 Americans conducted by JD Power, a consumer insights firm. At that point, inflation was hovering around 2.4% year-over-year. Economists say the conflict with Iran could drive up energy and transportation costs, elevate prices for other goods and increase the broader cost-of-living.
Consumers were cutting before the prospect of a war-fueled surge in inflation. Many nixed discretionary purchases, with 45% reducing visits to restaurants or takeout orders, 42% buying less expensive food, and 42% delaying the purchase of apparel, home decor or other items, the survey said.
Consumer spending is the engine that powers the economy. If war with Iran pushes up prices and further slows consumer spending, corporate profits will take a hit and companies may want to hold off on hiring.
Some also started easing off essentials. About 34% of those surveyed turned down the thermostat, and 33% bought less food over the previous 30 days, the survey said. Some 16% of consumers postponed or canceled medical care, or went without medications, the research found.
Americans have responded to persistently high inflation by looking for ways to make extra money and decreasing how much they save or put towards paying off debt, JD Power said. The cost-of-living, as measured by the Consumer Price Index, has been above the Federal Reserve's 2% annual inflation target for roughly five years, Bureau of Labor Statistics data shows.
“Yes, consumers are exhibiting resilience in the face of financial difficulties, finding ways to creatively patch together a tighter budget, but some of the spending cuts being made by a wide swath of consumers aren’t necessarily sustainable,” JD Power said.
Relief may not be on the horizon. The price of oil – as measured by West Texas Intermediate futures, the U.S. crude oil benchmark – has risen roughly 70% since the start of the war in late February, as shipments through the Strait of Hormuz have been largely halted.
That has led to higher prices at the pump—gas now averages more than $4/gallon, the highest level in four years—and more expensive airfares, as airlines pass on their costs to consumers.
Meantime, disrupted fertilizer shipments have created shortages for farmers and could add substantially to food costs in the coming year.
U.S. inflation could hit 4.2% this year, according a recent forecast from the Organisation for Economic Co-operation and Development.
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