Macro and Market
Equity
Inflation

Market Minute

Insights From Our Investment Teams
By Mike Rode, CFA
AUG 19 | 2022
Cityscape at night.

How Are Soaring Prices Changing Consumer Spending?

We think the surprising shift in behavior changes the outlook for consumer-oriented sectors.

What's Happening?

Consumer behavior is shifting. As inflation mounts, we’re spending less on discretionary items that are “nice to have” and more on everyday staples we need.

Why Does It Matter?

Many retailers are stuck with excess inventory of discretionary products like TVs and furniture.

Who Benefits?

Companies that provide the everyday staples we need (like groceries) may be better positioned to take advantage of changing consumer behavior.

How Did We Get Here?

The pandemic causes an unprecedented economic downturn.

The government stimulates the economy by putting trillions of dollars into consumers’ hands.

Unemployment claims fall dramatically as the economy rebounds quickly.

Higher wages and soaring home prices also boost consumer wealth.

Inflation takes off.

Inflation Takes Off

The prices of gas, food, clothing, housing and other goods and services have risen at a rate not seen in 40 years.

Consumer sentiment has deteriorated, leading to a cutback in household spending, slower economic growth and perhaps a recession.

  • December 1974

    Inflation rises to 12.1% as oil prices spike

  • April 1981

    Inflation rises 14.6% after oil shock

  • Early 80s

    Inflation rises 14.6% after oil shock

  • October 1990

    During the savings and loan crisis, inflation rises to 6.3%

  • July 2009

    Financial Crisis causes deflation of 2.0%

  • March 2020

    Pandemic causes lockdowns

  • June 2022

    Annual inflation hits 9.1%

Yearly Change in Consumer Price Index (%)

Data from 1/1/1960 — 6/30/2022. Source: U.S. Bureau of Labor Statistics.


Consumers Change Their Habits

Consumers spend more on the basics because of inflation…

… but they’re ready to get out of the house.

They cut back on nice-to-have products like home furnishings and TVs …

… and they continue to buy need-to-have items like food and beverages.

Less Spending On "Nice to Have"

Target Stock Price Change in 2022.

Data from 12/31/2021 – 6/30/2022. Source: FactSet. Past performance is no guarantee of future results.

In spring 2022, pandemic-weary consumers found themselves spending more on gas, groceries and rent.

Still, they were ready to get off the couch. They started spending more on entertainment and hit the road in such large numbers that the term “revenge travel” was born. 

Many retailers were caught off guard. The change in spending patterns left them with a glut of stay-at-home goods, such as TVs and furniture. Many had to cut prices to clear their shelves to make room for back-to-school and holiday merchandise. 

Inventory clearance pricing hurt the profits and near-term outlooks of some of the world’s largest retailers. For example, in the second quarter of this year, Target slashed its earnings forecast and its stock price nosedived.  

More Spending On "Need to Have"

We think some of the companies that make and sell food, beverages, soap and other need-to-have items may be positioned to navigate this challenging environment.

Consider Kellogg. The company offers iconic brands in the cereal, snack and frozen food aisles that consumers tend to shop regardless of economic conditions. Kellogg has a particularly strong presence in the cereal category, which is expected to grow steadily in the coming years.

In addition to benefiting from long-term demand trends, select food companies have successfully maintained profit margins despite near-term cost pressures. Some have accomplished this by simultaneously raising prices and reducing portion size.

U.S. Breakfast Cereal Market Size, (Revenues in billion USD).

Data from 1/1/2014 — 12/31/2027. Source: Statista. The breakfast cereal segment includes muesli and other grain-based breakfast products such as corn flakes and oats.

Summary

We think certain consumer staples companies—especially those in the food industry—are well-positioned to navigate changing consumer spending habits and inflation.

Conversely, heavy discounting will likely lead to lower profitability for retailers selling discretionary items. (So be on the lookout for more markdowns and sales.)

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Author
Mike Rode, CFA
Mike Rode, CFA

Vice President

Senior Client Portfolio Manager

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How Are Soaring Prices Changing Consumer Spending?

This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

References to specific securities are for illustrative purposes only, and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.