What is the largest inflation concern for the economy? The consumer holds the key to the answer.

• Since the mid-1940s, the percentage of Americans who anticipate their personal finances to deteriorate in the upcoming year has reached its peak, according to the most recent reading from the University of Michigan's consumer survey.
• Some indications suggest that grocery shoppers may opt for lower-priced options in the near future.
• Despite the pandemic, the economy is doing well due to factors such as wage increases, job market confidence, high savings rates, and the spending of higher-income consumers.

The durability of consumers is a major concern for both Wall Street and corporate America's C-suites.

Consumers have not yet started to resist higher prices due to demand shocks, supply chain disruptions, and surging energy prices. Companies have successfully passed on higher costs to consumers, and the historically high rate of savings among Americans has contributed to the present economic strength, along with higher wages and job market confidence.

The latest data from early earnings reports is positive, as last week's quarterly results indicated no signs of consumers opting for lower-priced options on supermarket shelves.

According to Stifel analyst Chris Growe, General Mills' performance this past quarter was strong in comparison to expectations, and their guidance was even better.

Stifel's analysis shows that the company's recent quarter saw an increase in double digit pricing and cost savings, which more than offset inflation.

Growe stated that the pricing coming through for large-cap food companies in February was up nearly 11%, which is sufficient to offset inflation. He added that there is an increasing degree of confidence that the pricing/cost balance will take hold in the relatively near-term.

Wall Street is concerned about how long the current situation will remain beneficial for both bottom lines and pocketbooks. Inflation is not decreasing, so companies are struggling to increase prices without keeping gross profit dollars flat. Stifel's recent survey data shows that consumers are becoming more concerned about grocery prices. This could lead to increased elasticity for branded food products, as private label products are typically priced 35%-40% lower. As a result, some trade-down activity may occur.

CNBC reports that CFOs of major corporations are monitoring a factor that has not yet occurred in the second half of 2022.

Growe stated that it might begin in the near future, and increased elasticity could diminish the advantage from all pricing.

This year, the relationship between price movement and consumer demand, known as elasticity, has deviated from historical norms. However, it can be said that consumers are feeling uneasy.

The University of Michigan's Survey of Consumers for March 2023 revealed that American expectations for their personal finances to deteriorate in the upcoming year increased by the largest amount since the survey's inception in the 1940s. Nearly half of households anticipate a decline in their inflation-adjusted incomes in the coming year. Inflation was a significant factor, with more consumers citing reduced living standards due to rising prices than at any other time except during the two worst recessions in the past 50 years: from March 1979 to April 1981 and from May to October 2008.

Ricard Curtin, the survey director at the University of Michigan, predicts that the consumer will remain strong due to rising wages and employment opportunities, despite 4 million Americans quitting their jobs in February. Additionally, the stimulus packages that led to increased savings continue to boost the spending power of upper-income households, even if lower-income consumers have less financial resources.

The Conference Board's monthly confidence index reading on Tuesday revealed a slight increase in present confidence in March, marking the first rise this year, while future expectations decreased, with consumers mentioning rising prices, including gas prices, as the reason.

According to Gallup's latest survey, approximately 17% of Americans consider the high cost of living, or inflation, to be the most pressing issue for the country.

The importance of the high-income spender to the economy

Mark Zandi, Moody's chief economist, states that the high-income consumer is crucial to the U.S. economy, as they account for 75% of all spending. According to Zandi, if high-income consumers decrease their spending, it will not significantly affect overall consumer activity.

High gas prices have not affected low-income households as much as expected, as they have excess savings and strong wage increases. However, this may change in the future, as Moody's predicts that lower-income consumers will become more cautious with their spending due to higher gas prices and dwindling savings.

Inflation has already reduced the living standards of a third of consumers in Michigan, with gas and food prices being the most common purchases. As these prices rise, the pain will intensify, according to Curtin. However, consumers are currently anticipating higher prices and engaging in self-generating buying cycles. While the Russia-Ukraine war is a potential inflation factor for both food and energy, the data suggests that companies may be able to pass on costs for the rest of the year, and consumers may be receptive.

Despite the pandemic, inflation, and war in Europe, consumer sentiment readings are not always accurate. However, even if sentiment is influenced by these factors, as well as politics, recent data indicates that it is fragile.

When consumers start to cut back on discretionary spending, particularly on meat and dining out at restaurants, it's a sign that they are trading down in various consumer items, according to Zandi.

Zandi expects the housing market to experience a slowdown in price growth, with the possibility of weakening prices, within the next year.

The housing market has been experiencing strong prices, which is crucial because housing is the most rate-sensitive sector of the economy and is already showing signs of stress as mortgage rates rise. The inevitable damage caused by this can significantly affect how the U.S. consumer feels about their overall finances. When people buy and sell homes, they also make other purchases such as cars, furniture, and home improvement, which drives additional consumer activity. According to Zandi, the ripple effects of this will be significant, and the link between house prices and people feeling they have equity is also important. However, Zandi believes that this feeling of security may not continue, as it currently feels tenuous.

Michigan's consumer expectations survey has a history of accurately predicting recessions since the post-World War II era. It typically signals an economic downturn six months to a year in advance, and the latest survey results indicate that a difficult time is ahead. "We are in for a challenging period," Curtin stated.