Price Conscious Consumers Continue to Look for Cuts, a Pattern Apparent Even In High Income Households

Among the 20+ categories in Morning Consult’s inflation and supply chain tracker, only three categories registered a decline in price surprise in July compared to the previous month: home appliances, home improvement supplies and restaurants. The drops were not sizable, especially compared to the increases in price surprise for several categories.

Price surprise measures “surprise” among those who purchased the specified category. Since some purchases are not incurred as often as others, we often look at this index figure as a three-month moving average, in order to mitigate some category-level volatility. At a topline level, the price surprise index continued to fall, which is in line with slowing growth in the consumer price index.

In the high inflationary environment of the last couple of years, consumers have had two options: either trading down to a good or service that is cheaper - measured by Morning Consult’s Substitutability index - or if possible completely walk away from the purchase, captured by the Price Sensitivity index.

At the aggregate level – looking at a three-month moving average – Morning Consult data shows that consumers have lowered their rates of substitution in the last three months while also increasingly “walking away,” which could indicate lower consumer spending in the near term. Faced with higher-than-expected prices and perhaps not enough options to substitute, consumers could be more likely to skip the purchase altogether. As noted in our latest State of the Economy report, consumer finances are deteriorating, evident in not only how U.S. consumers are feeling about their personal finances, which have been sliding since spring, but also in their savings conditions. 

Not every category faces a similar trade-off: In fact, during times of high interest rates and inflation, nonessentials are among the first to be traded down or cut off from budgets. Restaurant or take-out purchases continue to be one of the categories first on the chopping block. A concerning development for near-term spending on this category is that even the high-income households, who traditionally spend more on eating out, have reported increasing levels of “walking away.”

At the same time, substitution behavior for high-income adults has been generally trending down. A possible explanation could be that instead of substituting down to a different level of eating out – from sit down restaurants to quick service restaurants – consumers may be abstaining from eating out entirely to instead purchasing groceries and eating at home. 

Prices are rising in both full service and limited service restaurants well above the food-at-home (grocery) price growth, which was hovering around 1.3% in June. Restaurants have been incurring higher wage costs, which are then passed onto the consumer. Wages make up a substantial share of costs for restaurants, while ingredients for cooking at home do not have the same labor costs.

Inflation outlook for July

Price surprise for the restaurant category only dropped marginally month over month. Our nowcast inflation measure takes into account restaurant categories along with groceries and several others. For July, Morning Consult’s nowcast shows monthly inflation unchanged at 0.0% month over month compared to consensus expectations of 0.2%. Stock market volatility last week following the latest employment situation report and the Fed’s decision to hold interest rates steady in July would indicate that market watchers will be paying close attention to this inflation release in order to gauge the magnitude of potential interest rate cuts in the upcoming months.