With the rate of inflation rising significantly in the world economy, many households are experiencing falling real incomes. This is particularly true because so much of the current jump in prices is due to cost-push factors caused by rising energy and food costs. This type of inflation particularly affects poorer households who spend a high proportion of their income on food and energy.

But how do high current levels of inflation affect consumer decision-making?

Here are some observations of US consumers in 2022:

• Most households have changed their buying behaviour because of inflation. A study by the research firm Nielsen suggested that 80% of US households had changed their buying habits because of inflation.
• There is some evidence of consumers bringing forward the purchase of some items to ‘get ahead’ of inflation by buying goods before they increase in price. Consumers of olive oil, for example, have been buying up and stockpiling the product with significant future price increases in news reports.
• Many consumers are switching to cheaper brands such as own-label products sold by retailers and moving away from premium brands. Instead of buying Ben and Jerry’s ice cream, for example, consumers have moved to cheaper supermarket brand alternatives.
• People are also more attracted to supermarket promotions because of rising prices. Money-saving deals have become particularly attractive to price-sensitive shoppers. This applies to things such as multi-buy promotions on items like washing powder and dishwasher tablets where consumers are attracted by ‘buy one and get one free’ promotions.
• Some consumers have switched to discount retailers and away from more expensive shops. ‘Dollar Stores’ have, for example, seen a big increase in sales as inflation has increased.
• Households are also spending significantly more time searching for the best prices than they have in the past. Consumer price searches have been supported by a number of online apps such as Shopsavy and Price Pirates which help buyers find the best prices.
• Inflation is also increasing stress and anxiety levels amongst consumers. A recent report by the consumer research company Vericast found that 50 per cent of people said rising prices due to inflation was negatively affecting their mental health.

Do all consumers always lose when there is rising inflation?

If you are a consumer in a strong bargaining position in the labour market then you may well be able to negotiate a wage increase above inflation and experience a rise in real income. Rising inflation might also make consumers more aware of price and value when they are purchasing goods and services and make better buying decisions because of this.

Possible questions to discuss with a class

1. At what level of inflation do you think consumers change their behaviour?

2. What types of consumers change their behaviour the most when inflation rises?

3. How do your think retailers might respond to the changes in consumer behaviour identified in the text?

4. Do all consumers lose when there is high inflation?