Is There a Tipping Point for Rising Consumer Costs?

Experts say spending should stay the course this year, but next year is the big question.

May 03, 2022

Consumer unhappily Looks at Prices

ALEXANDRIA, Va.—Rising costs are hitting consumers at every turn, and many Americans are shifting where they spend their money. With inflation up at its highest point in four decades, the question is when and where will consumers cut spending?

CNBC reports that companies are passing along costs to their customers, and some are feeling an impact, such as Netflix, Amazon, video-game maker Activation Blizzard, Whirlpool and 1-800-Flowers. All these companies posted weaker 2022 first-quarter sales. Yet, some companies are seeing demand continue for their products. Coca-Cola, Chipotle Ford, Kraft Heinz and McDonald’s all posted strong earnings in the most recent quarter.

But there is a tipping point. Coca-Cola CEO James Quincey told CNBC that customers won’t “swallow inflation endlessly.”

Domestic airline bookings fell 2% in the first two weeks of April compared with the previous two weeks, marking the first decline over such a timeframe this year. Looking back at March, bookings rose 12% from 2019, with customer spending on those bookings up 28%.

In addition, traffic at restaurants fell 1.7% in March. Plus, rent is rising with single-family rents gaining a record 12.6% year over year in January, and home prices jumped nearly 20% in February.

Consumer confidence was slightly lower in April at 107.3 than it was in March, which was a revised 107.6.

"The Present Situation Index declined, but remains quite high, suggesting the economy continued to expand in early second quarter," said Lynn Franco, senior director of economic indicators at The Conference Board in Washington. "Expectations, while still weak, did not deteriorate further amid high prices, especially at the gas pump and the war in Ukraine. Vacation intentions cooled, but intentions to buy big-ticket items like automobiles and many appliances rose somewhat."

“We’re not really seeing many signs of slowdown, despite the worries that are happening in the market,” said Anna Zhou, a U.S. economist for Bank of America. A reason for this is because Americans have more in their savings account—low-income households have $3,000 in their bank accounts, which is close to double what they had in 2019.

“For this year, consumer spending should remain resilient,” said Zhou. “For next year, it’s a little less certain—and certainly toward the second half of next year, that’s when risk of more of a slowdown in consumer can arise.”

Boeing CEO Dave Calhoun told CNBC that demand for new planes is recovering, but it’s not clear if American will continue to pay for higher-cost trips or if they will hit a point where they need to cut back on spending.

“That second year, when inflation begins to take a toll on consumers’ pocket, that is when those numbers really begin to matter to us,” Calhoun told CNBC.