In consumers’ minds, the United States economy has been teetering for the better part of two years.
Recession fears remain common, and projections for recovery from this high inflation phase extend further. This concern is widespread, with most consumers reporting that inflation worsens daily life. But how are consumers coming to that conclusion?
PYMNTS Intelligence has studied U.S. consumers’ inflation sentiment for more than one year. The latest findings build on earlier trends to reveal that the key is income — specifically, the extent to which wages keep up with inflation.
The reality that wages are not keeping up with inflation skews those consumers’ sense of whether the economy is strong. They are more likely to believe the U.S. is in a recession and that it will take two or more years to recover to pre-2021 inflation levels. They also report elevated levels of concern about prices.
With 85% of consumers feeling their wages have not kept pace with inflation, the impacts of these widely adopted ash-colored glasses are already visible. Data shows that consumers are more willing this year to skip or make partial credit card payments and give up digital media subscriptions than in September 2022, for example. These attitudes may ripple throughout the upcoming holiday spending season and beyond.
This report is the 15th installment in the “Consumer Inflation Sentiment” series exploring consumers’ outlook on the American economy. For “Consumers’ Economy Concerns and the Price of High Prices,” we surveyed 2,117 U.S. consumers between Sept. 7 and Sept. 18 to better understand long-term trends impacting consumers’ economic concerns — and uncover the thought pattern that likely explains why their internal estimates of inflation are so high.
Inflation Concerns and Consumer Wages
Just 2.9% of consumers do not express concern about the economy.
Consumers have consistently worried about current and near-future economic conditions throughout the past year. During that span, the share of U.S. consumers who are very or extremely concerned about the economy has oscillated between 59% and 67%. At any given point since August 2022, most consumers have felt the highest levels of concern that the PYMNTS Intelligence researchers measure. The latest data reveals that 62% of consumers exhibit these high levels of concern, 5 percentage points lower than one year ago but 3 percentage points higher than 2023’s lowest point. With 35% slightly or somewhat concerned, just 2.9% are comfortable with the economy’s current direction.
This wide-ranging discontent may help explain why more than two-thirds of consumers said they believe that the U.S. either will enter a recession or is already in one, at 53% and 18%, respectively.
Consumers whose wages have not kept pace with inflation in the past year are 21% more likely to think the U.S. is currently in a recession than their counterparts with stronger wages.
Just as wind and rain quickly illustrate the severity of a storm, income — and how well that income is holding up to inflation — is a key metric of the economy’s health for many consumers. Overall, 15% of consumers see their income increase to match inflation. Although higher-income consumers, millennials and bridge millennials are faring better than most, 1 in 4 members of these subgroups have seen income increases that match inflation, meaning three-quarters need to do more with less.
This lack of parallel between income and inflation seems to be darkening consumers’ perceptions. Among consumers concerned about the economy, those who report their wages have stayed the same or decreased in the past 12 months are 21% more likely to say the U.S. is already in a recession. Fifty-four percent are more likely to believe it will take two or more years for inflation to die down to pre-2021 levels. Heightened pessimism among these many consumers is particularly meaningful. On average, consumers do not expect inflation to return to pre-2021 levels until spring 2025.
Rising Prices Change Consumer Perceptions
Against this backdrop of generally stagnant and declining wages, high prices — and consumers’ outsized perceptions of them — are the main sources of pressure.
PYMNTS Intelligence’s research has uncovered a quirk in consumers’ perception of inflation and pricing. Rather than experiencing month-to-month inflation and observing the subtle shifts in pricing, consumers tend to report price increases that compare current prices to a pre-inflation-era standard.
On average, consumers perceived retail prices to have risen 23% between August 2022 and August 2023. Although that far overshoots the 3.7% inflation that actually occurred between those dates, it aligns much more accurately with the 27% cumulative inflation for retail products since 2019.1 Consumer sentiment is a perception, after all, and this tendency to compare to years in the past — and, as a result, exaggerate inflation’s impacts — is likely skewing their perspective on the economy.
Another factor skewing these perceptions is wage strength. Consumers concerned about the economy who report their wages have not kept up with inflation in the past 12 months are more likely to report concerns related to price increases than consumers whose wages have increased at least enough to keep pace. Seventy-seven percent of concerned consumers whose wages increased to match inflation are worried about high prices, and that share rises to 91% for those whose wages have failed to match inflation.
More than one-third of consumers report that the inflation rate has a very or extremely negative impact on their daily lives. Nearly two-thirds believe their financial goals depend on inflation returning to pre-2021 levels.
Keep in mind that consumers likely think of cumulative inflation when considering the current rate, but 37% report that the current inflation rate heavily impacts daily life. The impact of wage trends is stark. Forty-one percent of consumers with stagnant or declining inflation-adjusted incomes said the current inflation rate has a very or extremely negative impact on their lives. Twenty-five percent of those whose incomes kept up with inflation share that belief. In other words, nearly half of consumers whose incomes are not keeping pace said their lives are markedly worse every day. In contrast, three of every four consumers whose incomes are rising enough to match inflation said they do not feel an impact of that severity each day.
Across all income and demographic groups, U.S. consumers agree that inflation needs to come down for their personal financial health. Sixty-four percent of consumers said it is very or extremely important that the inflation rate returns to pre-2021 levels for the sake of their financial goals.
Conclusion
Consumers’ sensitivity to soaring prices has meant that inflation, rather than unemployment, is the primary driver of economic concerns. Their perceptions of inflation more closely mirror cumulative inflation than month-to-month measures, leaving a particularly bad taste in their mouths when combined with a trend of stagnant or decreased wages. More than any other factor, high prices directly determine how consumers feel about the economy — especially for the 85% whose comparatively reduced incomes are forcing them to do more with less.
Retailers, merchants and other stakeholders who benefit from perceptions of a strong economy should consider this heightened price sensitivity as they prepare for the holiday shopping season and the end of 2023. So long as consumers see prices as high, most will continue to believe that inflation and the risk of recession are likewise high and respond accordingly.
Methodology
“Consumer Inflation Sentiment: Consumers’ Economy Concerns and the Price of High Prices,” produced independently by PYMNTS Intelligence, analyzes wages’ impact on consumers’ outlook on the economy. We surveyed 2,117 U.S. consumers between Sept. 7 and Sept. 18 to gauge consumers’ beliefs about the rate of inflation, likelihood of recession, drivers of concerns and more. The sample was balanced to match the U.S. adult population in key demographic variables. Our respondents’ average age was 47.9 years old, 51% identified as female and 38% annually earned more than $100,000.
Read the September “Consumer Inflation Sentiment: Consumer Interest in Artificial Intelligence” and other previous editions of the series for more.
1. PYMNTS Intelligence made these calculations per an analysis of Consumer Price Index [CPI-U] data through August 2023.↩
