Consumers take differing views on inflation

Consumer prices have climbed steadily since last October, exceeding 5% on a year-over-year basis for the previous nine months. And as the war in Ukraine and economic sanctions against Russia have pushed commodity prices higher, it looks like future inflation reports will show a worsening picture.

Higher inflation is damaging to consumers and a risk for investors, leading many to make decisions with their money and savings that could adversely impact their financial plans. A recent poll of consumers by the Nationwide Retirement Institute® revealed timely insights about inflation, including differing views among older and younger generations. See highlights from our inflation survey here.

For financial professionals, these insights point to an opportunity to offer guidance during this tricky phase of the economic cycle and help clients stay on track toward their long-term financial goals.

Glass half empty?

Our poll found the majority of American consumers (56%) are pessimistic about the direction of the economy going forward. Negative outlooks are more prevalent among consumers from older generations, with over 60% of Boomers and Gen Xers saying the economy is getting worse, not better.

Shoppers in these older generations are also more likely to feel the strain of rising inflation on their household spending; 62% of Gen X consumers and 77% of Boomer consumers have perceived a change in their purchasing power. This may be due to a greater share of older consumers living on fixed incomes, where rising prices can squeeze household budgets and spending plans.

Younger consumers, in particular from Generation Z, seem less aware of the impact of inflation on their finances. Only about one-third Gen Z consumers say they’ve seen their purchasing power decline, while two in five consumers from this generation say their purchasing power has held steady. Along with low awareness, there seems to be less concern about inflation among younger consumers; in our poll, just 35% of Gen Z reported being very concerned about inflation, compared with 56% of the general consumer population.

Despite the widespread concerns about inflation across generations, clients should view the economic picture from all angles. The U.S. economy is actually performing better than these pessimistic views suggest. We’re still in the midst of an economic expansion, with job and wage growth remaining strong. Even with rising prices, retail sales have been robust, thanks in part to the wealth effect from appreciated housing and stock values.

But consumers see and feel the effects of inflation firsthand, especially when the pace of inflation reduces the lift from wage gains. That could explain why consumers are so pessimistic right now.

Inflation: Higher for longer?

Many older consumers likely harbor not-so-fond memories of the last period of sustained inflation. Throughout the 1970s and early 1980s, inflation spiked to double-digit levels, peaking at nearly 15% on a year-over-year basis in 1980. Current inflation levels remain a far cry from those extremes, but that doesn’t make the pressure from today’s higher prices less painful.

Those memories of a decade lost to inflation still haunt many Baby Boomer and Generation X consumers, who were at the ages of today’s Millennial and Gen Z consumers during the last surge in consumer prices. Our poll found that over half of all consumers (56%) think the current rise in inflation will be permanent, not temporary. Across generations, it’s older consumers – Boomers but more so Gen Xers – who are more likely to expect higher inflation to stick around for longer.

Changing behaviors

Despite low levels of awareness and concern, rising inflation appears to be having an impact on younger consumers in the spending and financial choices they are making. More so than older consumers, Gen Z and Millennial consumers are more likely to postpone or cancel buying a home or vehicle because of inflation. They’re also holding off on hosting a wedding or starting a family because of rising prices.

There are some dynamics between the older and younger generations for financial professionals to consider, although these differences were not part of our recent survey. Older consumers are more likely to have fixed incomes and tighter budgets, which tend to get pinched by rising prices, but Boomers and Gen Xers are more likely to have financial resources that can help buffer the impact from inflation.

Among younger consumers, their financial outlooks may be clouded by outstanding debt, especially for borrowing to cover higher educational expenses. Many Millennial and Gen Z consumers may already feel squeezed by debt repayments and higher interest rates, so the added constraints from inflation may not register as much for them. Additionally, higher inflation may have a lower impact on borrowers with high levels of debt where repayments are at fixed interest rates. Those expenses have stayed constant even as their wages may be rising.

On the other hand, younger consumers were more likely to change financial behaviors to help them manage inflation – but not necessarily for the best. The most common behavioral change Millennial and Gen Z consumers took in the last 12 months was to eat out less. Around 30% of both generational cohorts said they drove less because of inflation.

But around 15% of both younger generations said they reduced contributions to their 401(k) and similar retirement plans over the last year. For many, that won’t be a beneficial move in the long run; sticking with an investment plan through thick and thin is one of the best ways investors can stay ahead of inflation over the long term.

Waiting on the Fed

Across all generations, however, there’s an overall feeling that the Federal Reserve should be doing more to address the threat of rising inflation. Nearly two-thirds of all consumers surveyed in our poll said so, including half of Gen Z consumers. But Boomers and Gen X consumers were more likely to want the Fed to get more hawkish on interest rates.

A change in the Fed’s monetary stance has been in the works for several months, but the first real step toward tightening rates is expected to come when the Fed’s rate-setting board meets on March 16. The Fed has a tricky balancing act in the months ahead, seeking to reduce red-hot inflation with rate hikes, but not so much that they end up cooling the overall economy. As of this writing, interest rate markets have set a high probability of six total Fed rate hikes for the 2022 calendar year. The hope is that ongoing strength in the job market will offset the cooling effect from higher interest rates.

Opportunities for financial guidance

With higher prices likely to be higher for longer, financial professionals should take this opportunity to help clients across all generations understand the impact of inflation of their financial plans. While many older clients may remember the inflation crises of 40 years ago, their financial priorities are quite different today. Many clients may consider solutions that help lower exposure to inflation risk and protect their income during these periods.

Younger clients haven’t had the experience of inflation to draw lessons from, so many Millennials and Gen Z clients could use different advice. Stress the importance of investing over the long term and consider other solutions that can help them make their income go further and build savings for the life events that truly matter to them.