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Discretionary Spending vs Inflation
Are Sales Increasing?
Could be a sign the economy is contracting
When inflation hits, many consumers who feel the pinch will do the obvious and cut back on their spending.
Theoretically, for every penny of higher inflation, a certain number of consumers will go under and not be able to make ends meet. It sounds implausible that one penny more would cause people to go bankrupt but since price increases are infinitesimal and their effect on consumers is incalculable, the threshold to go from liquid (able to afford things) to illiquid (no longer make ends meet) can be stated as fact that a penny more can push at least someone, if not many someones, into financial ruin.
Consumers have many expenses. Some are the necessary costs we regard as must be paid in order to survive such as the food we eat and the energy to heat our homes while other expenses are ones that you can do without.
The “must-have” expenses are called essential or non-discretionary spending while the ones we can do without are called discretionary.
As inflation rises, the discretionary items are eliminated first by the consumer. One by one the consumer might start cutting back on the things they want but don’t absolutely have to have in order to keep within their budget.
As inflation rages on, if there is not an increase in income, one by one the discretionary purchases are eliminated. Many items are deemed more discretionary than others. Dinners out, expensive foodstuffs, new clothing, vacations and entertainment purchases might be the first to go while items that are deemed more important, but still discretionary, might be eliminated later. These might be music lessons for the kids, keeping the house at a comfortable temperature, streaming services, or gym memberships.
What things one eliminates and in what order they are eliminated in is obviously different for different people and what one family cuts back on might not be the same as what another family chooses to eliminate.
When looking at the economy as a whole, there are certain sectors that can signal the start of discretionary cutbacks. These usually include entertainment, dining, retail and travel. Next might be personal hobbies, subscription services and self-care services. Medical services could also be reduced as budgets get tighter as well as a host of other discretionary goods and services.
You can tell when cutbacks are occurring within the general population, when prices start to drop and product markdowns start to increase. This is a part of the self-correction mechanism that can start to slow the inflationary environment within an economy. Some companies might reduce locations, reduce inventory or cut staff. If the inflation is persistent, more companies will undertake more drastic measures such as filing for bankruptcy or just close entirely.
Food banks will see more clientele and the evening news will soon fill up with stories about how hard it is to make ends meet. The housing market will likely slow and the calls for the government to “do something” will increase.
The human factor will become more painful to watch and retirement plans like pensions and the like will suffer.
The grand shrinking of the economy will become more and more prevalent and widely acknowledged in the evening news. All of these mechanisms will reduce consumer demand and inflation will slow.
The extent of the economic contraction will depend on how much inflationary damage has preceded the slowdown, with that damage being the inflationary economic events that preceded it.
The question becomes how much damage is inflicted on the consumer before demand drops to the point of recession or even a deeper economic contraction.
It remains to be seen how many people will be affected and how severely, but if inflation stays persistent and stubbornly unyielding, the damage will be ongoing and difficult to measure, let alone forecast.
“Watching the markets so you don’t have to”
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(As mentioned, please use the below disclaimer exactly) THANKS (Regulations) This article expresses the opinion of Marc Cuniberti and is not meant as investment advice, or a recommendation to buy or sell any securities, nor represents the opinion of any bank, investment firm or RIA, nor this media outlet, its staff, members or underwriters. Mr. Cuniberti holds a B.A. in Economics with honors, 1979, and California Insurance License #0L34249 His insurance agency is BAP INC. insurance services. Email: news@moneymanagementradio.com.
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