Inflation may lead to a muted holiday shopping season

Indicators suggest consumers will spend cautiously this year.
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· 5 min read

What’s this year’s holiday shopping season going to look like? It’s complicated.

The National Retail Federation (NRF) predicts a somewhat muted holiday season, and one which represents a return to normal after a spending boom during the height of the pandemic. From 2010–2019, holiday spending grew at an average rate of 3.6% a year. But 2020’s spending outpaced 2019’s by 9.1%, and 2021’s topped 2020’s by another 12.7%. This year, though, the NRF expects spending to moderate, and forecasts a 3–4% rise overall.

Retailers are gloomy: But is even this cautious prediction too optimistic? Other indicators suggest it might be. The nation’s largest retailers sounded downbeat in Q3 earnings calls.

Target, for instance, saw same-store sales fall 4.9% in Q3, and its guidance suggests it expects a similar decline in Q4. Its CEO, Brian Cornell, spoke of consumers working to “stretch their budgets until the next paycheck” and making “tough choices when it comes to discretionary goods.” At Macy’s, where same-stores sales were down 6.7% in Q3, executives likewise noted that consumers were cutting back on discretionary spending.

Even Walmart, which had a solid Q3, with same-stores sales up 4.9%, stated that it expected growth to “moderate” in the next quarter. “Sales have been somewhat uneven and this gives us reason to think slightly more cautiously about the consumer versus 90 days ago,” CFO John David Rainey said.

Economic pessimism: These retailers may have their finger on shoppers’ pulse: Consumers’ view of the economy has soured significantly in recent months. The Conference Board’s Consumer Confidence Index has dropped each month since hitting a two-year high in July. University of Michigan’s consumer sentiment index has also fallen each of the past four months. That’s the case despite signs the economy is performing well, such as low unemployment and September’s surprise GDP growth.

How inflation might dampen holiday shopping: It’s hard to predict whether this economic pessimism will translate to lower holiday sales, Ben Meadows, assistant professor of economics at the University of Alabama-Birmingham, told CFO Brew. On the whole, Meadows agrees with the NRF’s prediction that holiday sales will grow by about 4% this season (“My bet is on a typical sales year,” he said).

Inflation, he said, may impact holiday shopping—but not because gifts will cost more this year. “Inflation on goods is actually very heterogenous,” he pointed out. Prices have actually declined this month in some popular gifting categories: TV prices, for example, are down 9.4% from last year, according to the Consumer Price Index. Across the board, though, inflation on goods is around 3.2% higher than last year, close to the Fed’s goal of 2%.

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“It’d be one thing if we were seeing 20% inflation on some of these goods, but since they are in that relatively normal range, I am strongly skeptical” that it will “lead to different purchasing decisions for holiday shopping,” Meadows said. Shoppers also may not purchase the types of items they buy for holiday gifts that often, he added, so they might not remember how much they once cost.

But inflation in other areas, such as grocery prices, can “[bite] away at people’s incomes,” Meadows said, which could cause them to cut back on holiday shopping. “My impression is that a lot of the negative consumer sentiment we’re seeing right now is related to typical purchase bundles” such as gas and groceries, he said.

Walmart’s Rainey seemed to acknowledge this dynamic during the retailer’s Q3 earnings call, stating that Walmart aims to lower prices on food to encourage consumers to spend more on general merchandise.

Consumers may also be budgeting around higher prices, which could translate to reduced spending. A McKinsey ConsumerWise survey found, 79% of consumers are “trading down” this year. In response, executives are foregrounding value in holiday promotions. Walmart has cut prices on gift items like the Barbie Malibu House, and has told customers their Thanksgiving meals will cost less than they did last year. Target is planning to offer a Thanksgiving meal for under $25 and has priced more than two-thirds of its toys at less than $25.

Volatility’s broken the crystal ball: Though retailers are taking prudent steps in what they see as a decline in consumer optimism, the truth is that it’s hard to predict consumer behavior with certainty in the current economic environment. In the past three years, as Meadows pointed out during a webinar on holiday shopping, we’ve been through massive unemployment and a robust stimulus package, and are now coping with high interest rates and inflation.

“In a normal year…you can say, ‘Year over year, I’m pretty sure [holiday shopping is] going to go this way,’” he said. “But we’ve just had a lot of economic weirdness over the past couple of years. We all have to be very careful about that.”

Correction 12/14/23: This story has been updated to reflect that it was University of Michigan's, not Michigan State’s, consumer sentiment index that fell.

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