In response to F. Scott Fitzgerald's assertion that the rich are very different from regular folk, Earnest Hemingway replied, "Yes, they have more money." Or so the story goes.
That money only goes so far, however, when prices rise incessantly.
There has been plenty written about the K-shaped economy, where high- and low-income earners feel dramatically differently about their spending power. Yet it seems that nearly all Americans across the income spectrum are feeling the pinch of persistently higher gas prices on top of years of inflation. They're just handling it in different ways.
Consumers are unhappy with price increases, and still retail sales climb higher and higher even when adjusted for inflation. With the job market holding relatively steady, there haven't been major pullbacks in consumer spending.
However, wages haven't kept up the pace with inflation in recent months, writes LPL Chief Economist Jeffrey Roach. That impacts lower-earning Americans more, since they have less of a financial cushion. But even those in a position to splash out aren't inclined to do so, Roach notes.
"Households say jobs are harder to find, expect weaker income six months from now, and see business conditions deteriorating. Fewer openings and tougher job-hunting have people feeling as gloomy as they did in early 2021...plans to buy a home, a vehicle, or a major appliance have declined from prior months."
Holiday shopping intentions tell a similar story.
A survey by Teneo found that lower- and middle-income households plan to cut their holiday spending by at least 20%. Higher-income earners, who have theoretically enjoyed healthy stock market gains, are planning to hold their spending steady. That is better than slashing budgets, but not as ebullient as expected. A majority of respondents across income cohorts said they were looking for deals. Value is key.
New research by Bernstein analyst Zhihan Mausing, who used traffic and demographic data from Advan, shows more of the same: Both high- and low-income Americans have changed their habits.
"The short answer is that low income consumers are shopping more frequently - with smaller baskets - in value channels (especially in nearby dollar stores to save on gas)," she writes. "Meanwhile, for higher income consumers who can afford to buy larger baskets online, they are likely turning more to e-commerce rather than trading down in the brick and mortar channel amid ongoing gas inflation."
Ma found that visits to Walmart remained in the mid-single digit range despite a modest slowdown "perhaps as elevated gas prices weigh on lower income customers' willingness to drive to a Walmart," she posits.
If higher gas prices relent, that could be a catalyst for growth for Walmart and other retailers no matter which income band they cater to.
Costco Wholesale, which tends to cater to shoppers higher up the income scale, saw its visits accelerate in the second and third quarter, likely driven by its cheaper gas offerings.
"Target showed the strongest sequential improvement, with visits growth accelerating to the high-single digit range...supported by Target's improved merchandising and in-store experience," she writes. Target is in the midst of a turnaround focused on bringing shoppers back with better merchandising that has helped it sidestep some of the broader retail pain this year.
Visits to Dollar Tree and Dollar General are both positive year over year, although the latter has seen its traffic decelerate throughout the year. However she cautions that investors shouldn't extrapolate too much from this, given Dollar General's expanding partnerships with DoorDash, UberEats and Instacart. Inflationary pressure has been a double-edged sword for these deep discounters. Higher prices have weighed on core, lower-income consumers, while leading to some higher-income shoppers trading down.
"Overall, the U.S. consumer has remained resilient but value seeking," Ma concludes. "Should gas inflation start to moderate, this could weigh on dollar stores' traffic but help basket size, while Walmart could see improved in-store traffic as people are more inclined to drive."
When gas prices -- currently around $4.30, near spring highs -- start to moderate is anyone's guess.
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