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Inflation May Not Affect Retail Shopping As Much As You Think

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All eyes are on the inflation numbers as the Fed meets again today and even though they are down from the peak they are still really high for what Americans are used to for the last three decades. This has led many to predict that Americans will dial back their spending particularly when it comes to this holiday season. A drop in spending would have a lot of implications for retailers and the malls and shopping centers they lease to sell their goods. But, despite a few surveys where people reported that they will dial back their gift giving, there doesn’t seem to be evidence of much of a drop in holiday spending (I guess people don’t always do what they say they will in surveys). 

Rationally it makes sense that consumers would spend less with inflation high since they get less for their money than ever. But when it comes to consumerism, sometimes it is everything but rational. People often are not thinking very far ahead at the moment of making a purchasing decision. Especially when it comes to smaller purchases, the kind retail stores often facilitate, the decision to buy or not has more to do with a person’s ability to earn back the money they are spending than their view of the economic situation. And as much as the Fed is trying, the job market is still strong enough to give most people confidence about their ability to earn a wage going forward.

Eventually a dwindling economy will leave everyone with less money to spend but high inflation is usually a sign of an overheated economy, not a sluggish one. Plus, rising prices and decreasing value of money actually gives an incentive for people to spend. Why wait to buy when that car or computer or carrot could be more costly next month? One of the places that this dynamic can be seen playing out is Argentina. Thanks to a combination of unsustainable political policies, labor protectionism, and sovereign credit defaults, Argentina has had double digit inflation per year for the past two decades and this year is on track to hit nearly 100 percent yearly inflation.

You would think that this kind of economic uncertainty would force most Argentines to stop spending but, actually their personal spending is on par with much of the rest of the world (even though they probably get quite a bit less for what they buy). In Argentina there are a number of different payment schemes that people use in order to get what they want without having to face the often brutal lending market. New payment arrangements are catching on here in the US as well with pay later plans growing exponentially.

While smaller purchases do not seem to be at the mercy of inflation, homeownership certainly is. Not only are loans shorter, harder to get, and often prohibitively expensive in Argentina, just the act of purchasing a house with cash that is losing value is hard to justify. The escrow period alone is often enough to require the buyer and seller to renegotiate the price based on the adjusted value of the currency. We are seeing this play out in the US as well. Homeownership is down thanks to higher interest rates combined with stubbornly high property prices. 

So as much as the talk right now is about a reduction in consumer spending that could hurt brick and mortar retailers already trying to survive against online competitors, that might be more academic than practical. Until we see job openings go down taking wages with it, I expect to see Americans continue to do what they do best, spend on things they don’t need. Eventually this could get us into even more trouble as personal savings dwindle, but most Americans will continue on in hopes that they will not have to worry about the time when the buck stops and the creditors come calling.

Overheard

Mapped

There is a large difference between how some countries contribute to consumer spending compared to others. This website has some interesting maps that show that just 9 countries account for two thirds of the total value of household incomes.

Other news

Americans continue to move to parts of the country that are seeing increased natural disasters, especially hurricane-prone Florida. (CNN)

A new JLL report breaks down the most expensive global office markets, as well as the markets that provide the best value. Central Hong Kong is the priciest office market by far, followed by Midtown NYC and West End London. (JLL)

Maryland’s most populous county (Montgomery) became the latest jurisdiction to pass building decarbonization legislation. Starting in 2027, all new construction will be required to use only electric energy equipment. (Smart Cities Dive)

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