As earnings season begins, what are big companies saying about consumer spending and inflation?

• Brian Niccol, CEO of Chipotle Mexican Grill, stated on CNBC's "Closing Bell" that there will be a significant shift in how Americans spend their money in the near future.
• On Monday, CarMax stated that decreasing sales in the hot used car market indicate "diminishing consumer confidence."
• Last month, inflation reached its highest level in years, and 48% of Americans are constantly thinking about rising prices, according to a CNBC survey released last week.

When do consumers decide they've had enough of paying higher prices for goods and services?

Inflation has surged to unprecedented levels, and C-suite executives across industries are grappling with concerns about balancing rising costs and consumer demand during earnings season.

Gary Friedman, CEO of the company, stated on the earnings call on March 30 that businesses will either make less money or increase their prices. He believes that the increase in prices will surpass the consumer's ability to keep up, leading to a challenging situation.

In March, consumer prices increased by 8.5% compared to the previous year, as per Labor Department data. This rise is the highest since the late 1970s and early 1980s, with core inflation being the hottest since August 1982. Additionally, the Producers Price Index, which measures what wholesalers are paying, experienced its largest year-over-year increase on record, rising 11.3% in March.

Despite rising prices in 2022, consumer spending has not been significantly impacted. Through February, year-over-year retail spending was up 17.6%, and January spending was revised up to a 4.9% increase, exceeding the initial estimate of 3.8%.

The increased demand is allowing companies to offset higher material and supply chain costs by passing them on to customers.

According to CFO Matt Friend, the company's gross margin expectations were increased by at least 150 basis points compared to the previous year due to the benefits of strategic pricing, as stated on the company's March 21 earnings call.

Despite a 2.6% decline in volume, the company's organic sales increased by 6% in its most recent quarter. The reason for this was a 8.6% increase in price/mix. CFO Dave Marberger explained on the company's April 7 earnings call with analysts that the volume decrease was mainly due to the elasticity impacts of the price increases.

Despite a booming job market, low unemployment, and high savings rates, Americans are still struggling to keep up with rising prices for goods and services. While wages have increased, they have not kept up with inflation. According to the Bureau of Labor Statistics, real earnings rose by 5.6% from the previous year, but real average hourly earnings had a seasonally adjusted 0.8% decline last month.

On Monday, a key earnings report from the used car market indicated a weakening of consumer strength.

Despite a 32.6% increase in used car revenue due to higher average selling prices, the company's used car unit comps dropped 6.5% in its most recent quarter. The company attributed the decline to several macro factors, including declining consumer confidence, the Omicron-fueled surge in COVID cases, vehicle affordability, and the lapping of stimulus benefits paid in the prior year period.

A CNBC survey released last week found that 48% of Americans are constantly thinking about rising prices, while 75% are concerned that higher prices will impact their financial decisions in the near future.

In order to combat higher prices, Americans are taking several actions, including cutting back on dining out (53%), canceling a monthly subscription (35%), and being forced to cancel a trip or vacation (29%).

A significant number of people, 32%, have already switched from a brand-name product to a generic version.

Even high earners, with 68% of respondents having incomes of $100,000, are concerned about the impact of higher prices on their financial decisions.

CEO Brian Niccol stated on CNBC's "Closing Bell" on Friday that although the company observes consumer strength, he anticipates that consumers will become more selective in their spending decisions in the future.

According to our data, individuals are now considering their driving habits and entertainment choices more carefully, as they are hesitant to spend money on experiences that may not align with their values.

Niccol stated that Chipotle, which previously announced a 6% increase in prices this year, resulting in customers paying approximately 10% more for their orders compared to the previous year, has the ability to adjust pricing as needed. However, he also mentioned that he would prefer not to have to continually increase prices and that they would have to wait and see how the situation develops in the future.

According to CNBC research, S&P 500 companies are predicted to experience earnings growth of 6.4% in the first quarter of 2022 and 6.8% in the second quarter, resulting in approximately 10% growth throughout the second half of the year. However, this growth is mainly due to the energy sector, which is projected to achieve earnings growth of 233.5% in the first quarter.

The consumer staples and consumer discretionary sectors are projected to experience a 1.9% and -11.9% earnings growth in the first quarter, indicating that the consumer spending and demand of the Covid era may be reaching a plateau.