Where American shoppers are still fighting inflation hardest: Morning Brief

·Head of News

Updated Tue, Aug 30, 2022, 2:30 AM5 min read

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Tuesday, August 30, 2022

Today's newsletter is by Myles Udland, senior markets editor at Yahoo Finance. Follow him on Twitter @MylesUdland and on LinkedIn.

Inflation pressures have been near 40-year highs for months.

And even with some recent signs of moderation in consumer prices — notably at the pump — household budgets are still being hammered in the grocery aisle.

In a report out Monday, the Dallas Fed's latest manufacturing survey showed some food suppliers are finding a pullback in demand for their more premium, organic products as these inflation pressures continue.

"Consumer behavior is shifting to lower-priced items in our category as they struggle with inflation," an executive in the food manufacturing industry told the Dallas Fed. "We see particular stress in our highest-end products, notably our organic beef sausage, as consumers trade down. We see strong consumer response to promotions, which is driving up costs."

Recent earnings calls and executive commentary from the retail sector have echoed this sentiment.

Earlier this month, Walmart CFO John David Rainey told Yahoo Finance the big box giant had seen "a trade down in both quality and quantity" during the second quarter.

"Instead of buying deli meats, we're seeing things like canned tuna and chicken and even beans, as units were up over 25% in the quarter," Rainey said. "They're buying smaller pack sizes to save money. We've seen an increase in the private brands growth effect, it's 2x for food what it was in the first quarter."

Consumers shop in the produce section of a Walmart store in Burbank, California on August 15, 2022. - Walmart, the largest retailer the United States, will report second quarter earnings on August 16, 2022. (Photo by Robyn Beck / AFP) (Photo by ROBYN BECK/AFP via Getty Images) — Consumers shop in the produce section of a Walmart store in Burbank, California on August 15, 2022. (Photo by Robyn Beck / AFP) (Photo by ROBYN BECK/AFP via Getty Images) (ROBYN BECK via Getty Images)

Last week, Dollar General CEO Todd Vasos said on the company's earnings conference call they've also seen more consumers coming to their stores to save money on groceries.

"For example, during Q2, customers appeared to be making trade-offs of some of their food choices, contributing to an increase in private brand penetration within our consumables business," Vasos said. "We also saw growth in the number of higher-income households shopping with us, which we believe reflects more consumers choosing Dollar General as they seek value."

So while energy costs have been the predominant factor in inflation readings we've seen this year, we don't think it takes a PhD in economics to understand why grocery appears to be the most cost-sensitive part of consumer budgets right now.

You can choose not to travel, or wait on buying new clothes, or delay a house project. Monthly savings can go down as a percent of household income, and many consumers may even be able to find ways to drive less. But eating and drinking cannot be stopped while consumers wait for prices to moderate.

There are some variables: Dining out versus cooking at home can, and does, move the needle on budgets. But ultimately, everyone needs to eat. And so everyone will notice, in some form or fashion, the impact inflation have on their grocery bill, resulting in more people making more changes to food shopping habits than any other category.

Of course, this doesn't mean inflation-related impacts are limited to grocery spending.

Data from Bank of America released Monday prices for domestic flights fell 0.1% last week compared to 2019 after having tracked north of these prices for most of the summer.

And the struggles at retailers like Bed Bath & Beyond and Kohl's suggest pressures in the sector are broader than just grocery aisle trade-downs.

But whereas consumers may haven chosen to upgrade their fuel choices amid falling gas prices during prior cycles, rising prices at the grocery store are pushing many consumers to downgrade the quality of their personal fuel choices.

Back in 2015, gas prices were crashing and economists were asking: What would consumers do with the excess savings? Some studies, like one cited in Nobel winner Richard Thaler's 2015 book "Misbehaving," suggested lower gas prices meant consumers just bought more expensive gas.

The logic? Households have budgets, and they stick to those budgets even when prices change. The gas bucket is the gas bucket, the travel bucket is the travel bucket, and so on.

Seven years later, it seems we're seeing this dynamic play out once again.

Except the impact on consumer habits now is the exact opposite.

What to Watch Today

Economic calendar

9:00 a.m. ET: FHFA House Pricing Index, month-over-month, June (0.8% expected, 1.4% during prior month)
9:00 a.m. ET: House Price Purchasing Index, quarter-over-quarter, Q2 (4.6% during prior quarter)
9:00 a.m. ET: S&P CoreLogic Case-Shiller 20-City Composite, month-over-month, June (0.90% expected, 1.32% during prior month)
9:00 a.m. ET: S&P CoreLogic Case-Shiller 20-City Composite, year-over-year, June (19.20% expected, 20.50% during prior month)
9:00 a.m. ET: S&P CoreLogic Case-Shiller U.S. National Home Price Index, year-over-year, June (19.75% during prior month)
10:00 a.m. ET: Conference Board Consumer Confidence, August (98.0 expected, 95.7 during prior month)
10:00 a.m. ET: JOLTS Job Openings, July (10.375 million expected, 10.698 million during prior month)