Consumers: Buying Power in 2022

Consumers: Buying Power in 2022

One of the biggest economic stories of the first quarter was the rising rate of inflation, as consumer prices reached a 39-year high by the end of 2021. In the first quarter, the inflation rate floated around 7%.

Higher prices tend to hurt low-income families the most since the majority of their spending is on necessary consumables. This is especially true now that child tax credits – representing $300 to $360 payments per child per month – have come to an end. That money was largely used for food, clothes, school supplies and other essentials, so it contributed to overall consumer spending that drives the economy.1

In contrast, households that don’t need government stimulus, such as the $600 and $1,400 checks that were issued during the first year of the pandemic, are more prone to save surplus assets. Instead of spending that money to help jump-start the economy, a lot of wealthier households used it to augment savings during the pandemic. In aggregate, U.S. households saved up an excess of $2 trillion during the pandemic.2 That can be helpful for individuals to bolster their emergency savings, but it doesn’t help stimulate the economy.

It is important for all households to have robust liquid savings they can tap into during times of hardship. However, retaining too much in low-interest-rate accounts means that money may not keep up with the rising cost of living. That is especially true now, in a higher interest rate environment. If you are looking for ways to secure your money but also give it the opportunity to grow, we have an array of insurance products that may fit the bill. Contact us for more information about what vehicles may best suit your needs.

Rising prices are a sign of a growing economy, but unless wages keep up with inflation, that’s going to hurt consumers. We have seen significant income growth over the past year, but nowhere near the current 7% inflation rate. However, some economists predict that inflation will retreat as far back as 2.9% by the fourth quarter of this year.3

The Federal Reserve has made it clear that it intends to raise interest rates. Again, rate increases are more likely to impact lower-income consumers than households with considerable assets. Higher interest rates can increase payments on mortgages with a variable interest rate. However, 90% of American mortgages are at fixed rates. In fact, mortgage loans represent 70% of household debt and another 10% is in auto debt (also generally locked in to a fixed rate). Therefore, higher interest rates will be most painful for people who retain a balance on credit cards and other variable-rate loans. Unfortunately, once again, lower-income households are more likely to maintain credit balances, so this consumer group will be the most affected by a rising interest environment.4

As for the consumer market for the rest of this year, inflation should tame as supply chain woes improve and inventories are restocked. No group is looking more forward to this scenario than potential car buyers. If they have to spend more money on higher prices, they are looking for better value. One survey found that 66% of Americans are considering purchasing an electric vehicle (EV) now that the new infrastructure bill will support nationwide charging stations and financial incentives.5

Millennials are expected to be one of the predominant consumer groups for the foreseeable future. They’ve come into their own with hard-fought experience they can exploit for higher wages and more flexibility in today’s job market. And with higher discretionary income, economists predict millennials will spend more money on travel, apparel and the housing market in 2022.6

Ellen Zentner and Sarah Wolfe. Morgan Stanley. Jan. 28, 2022. “New Challenges for The US Consumer.” https://www.morganstanley.com/ideas/thoughts-on-the-market-zentner?subscribed=true&dis=em_202222_wm_5ideasarticle&et_mid=318442&et_mkid=. Accessed March 2, 2022. 2 Lucia Mutikani. Reuters. Feb. 25, 2022. “Robust consumer spending, core capital goods orders highlight U.S. economic strength.” https://www.reuters.com/business/us-consumer-spending-beats-expectations-january-inflation-rises-further-2022-02-25/. Accessed March 2, 2022. Ellen Zentner and Sarah Wolfe. Morgan Stanley. Jan. 28, 2022. “New Challenges for The US Consumer.” https://www.morganstanley.com/ideas/thoughts-on-the-market-zentner?subscribed=true&dis=em_202222_wm_5ideasarticle&et_mid=318442&et_mkid=. Accessed March 2, 2022. 4 Ibid. CarPro. Feb. 2, 2022. “Cars.com: 2022 Auto Buying Trends.” https://www.carprousa.com/blog/cars.com-2022-auto-buying-trends. Accessed March 2, 2022. Vijay Chandar. Morgan Stanley. Feb. 15, 2022. “Megatrends: Counting on the Long-Term Strength of U.S. Consumers.” https://www.morganstanley.com/articles/consumer-megatrends-spending-boom. Accessed March 2, 2022.
We are an independent firm helping individuals create retirement strategies using a variety of insurance products to custom-suit their needs and objectives. This material is intended to provide general information to help you understand basic retirement income strategies and should not be construed as financial advice.
 The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions.
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