Higher Perception of Inflation Drives Paycheck-to-Paycheck Consumers to Trade Down

After reaching a high of 9.1% in July 2022, inflation has gradually dropped, settling at 3% in first half of 2024. ¹ The overall inflation rate is made up of several components. Inflation rates for shelter and electricity have dropped but remain among the highest. Inflation rates for dining out remain high, yet food, gasoline and apparel inflation rates have decreased from previous highs and are now among the lowest.

Despite decreases in inflation rates, consumers continue to perceive that the cost of everyday essentials, including groceries and retail products, are on the rise. This is especially true among struggling paycheck-to-paycheck consumers. In addition, 7 in 10 consumers believe that their income has not matched inflation. As a result, from groceries to retail, many consumers are trading down. If they’re buying at all, many are buying cheaper or lesser quality alternatives.

These are just some of the findings detailed in this edition of “New Reality Check: The Paycheck-to-Paycheck Report,” a PYMNTS Intelligence exclusive report. This edition, How Consumer Perception of Inflation Forces Many to Trade Down, examines the financial lifestyles of U.S. consumers and explores the impact of household size on their financial standing. It draws on insights from a survey of 2,583 U.S. consumers conducted from July 9 to July 18 and an analysis of other economic data.^2,3,4

• What’s at Stake
• Key Findings
• Conclusion
• Read More
• Methodology

What’s at Stake

PYMNTS Intelligence’s data finds that the share of paycheck-to-paycheck consumers dropped slightly in the last month, resuming the volatile changes we began to see in January. As of July 2024, 63% of consumers lived paycheck to paycheck, up from 62% in July 2023.

Since July 2023, the share of consumers living paycheck to paycheck with issues paying their monthly bills has increased 2 percentage points to a high of 23%. The share of consumers who struggle to pay their monthly bills has also been steadily rising since February. Meanwhile, the share of consumers living paycheck to paycheck without issues paying their monthly bills is currently 40% — the same as July 2023 but a notable drop from 44% in May 2024. This volatility suggests that consumers at the edges of each financial lifestyle may move between back and forth between them.

Key Findings

The perception of inflation is higher than the reality, especially among struggling paycheck-to-paycheck consumers.

Most consumers report prices for food and basic necessities have increased in the last year. They were most likely to note the rising cost of fresh meat and produce. Prepackaged products were close behind, with 78% of consumers noting a rise in cost. This is followed by prepared foods and household goods, at 77% each. Nearly three-quarters of consumers believe restaurant prices are on the rise. Meanwhile, 71% believe that gas prices are still rising. These findings suggest that consumers tend to perceive rising costs for items they buy regularly, even as inflation rates have dropped in many of these areas

When looking at consumers who thought prices increased, more financially constrained consumers think that prices increased far more than consumers who do not live paycheck to paycheck. For instance, 86% of consumers living paycheck to paycheck with issues paying their bills cite increases in the cost of fresh meat and produce. In fact, these consumers believe fresh meat and produce prices increased 38%. In contrast, consumers who do not live paycheck to paycheck believe these prices increased 19%. Such stark differences are evident across all product categories.

Meanwhile, a recent study by the U.S. Bureau of Labor Statistics found low-income consumers experienced greater inflation rates for food, beverages and housing.⁵ This suggests more financially constrained consumers may be accurate in their perception that inflation rates are higher for them.

Consumers believe that incomes don’t match inflation, forcing many to change their shopping behavior.

As financial constraint rises, consumers are less likely to think their income keeps pace with inflation.

Paycheck-to-paycheck consumers, especially those struggling to pay monthly bills, are the least likely to say their incomes offset inflation. While 77% say their income did not or only somewhat offset inflation, only 16% say their income fully offset inflation. Among those living paycheck to paycheck without difficulty, 70% say their income did not or only somewhat offset inflation, while 19% say their income fully offset inflation. Even among those not living paycheck to paycheck, 61% say their income did not or only somewhat offset inflation.

While more financially secure consumers are the most likely to have their incomes offset inflation, just one-quarter say it has. The majority of consumers, regardless of financial lifestyle, do not feel their incomes have kept up with inflation.

Nearly all paycheck-to-paycheck consumers who perceive costs rising say they have adjusted their spending in response. Consumers who do not live paycheck to paycheck are less likely to change their behaviors, yet the majority still do.

Consumers who think costs are rising were similarly as likely to change their shopping strategies across all product types. Paycheck-to-paycheck consumers with issues paying their bills are the most likely to make adjustments. Paying for travel services, at 99%, is the top area they’re adjusting. In contrast, 87% of paycheck-to-paycheck consumers without issues paying their bills are adjusting their use of travel services. Similar shares of struggling and non-struggling paycheck-to-paycheck consumers have adjusted their spending on groceries, restaurants and retail products. These findings highlight how much consumers’ perception of inflation has impacted their spending behavior.

Consumers embrace different strategies for managing their spending in the face of rising costs and inflation depending on what they are buying.

Turning to cheaper merchants or products is a common way consumers respond to rising costs for all spending categories. Consuming less is also a practice consumers adopt to reduce spending. For instance, 37% of grocery shoppers are minimalists and opt to buy fewer treats. Another 31% of grocery shoppers are bargain hunters. Only 9.9% are quality compromisers when shopping for groceries. In retail, 42% of consumers become bargain shoppers rather than abstain. When it comes to travel, 36% of consumers become bargain shoppers instead of abstaining.

Minimalist consumers, at 70%, were the most likely to eat at home more in response to rising restaurant costs. Nonetheless, restaurants have reported higher earnings.⁶ This suggests eating at home could mean only one additional meal at home. Some consumers, especially retail shoppers, at 12%, become conscious consumers and adopt a more community-focused, sustainable approach. These consumers may opt to grow their own food, engage in trade or barter, or reuse or repurpose items to cut back on expenses.

Data shows the ways in which spending behavior changes as financial constraint rises. For groceries, consumers are more likely to become quality compromisers as finances grow tighter. Paycheck-to-paycheck consumers are also more likely to cut back on treats and household items than consumers not living paycheck to paycheck. Paycheck-to-paycheck consumers are also more apt to adopt a minimalist approach to restaurants and eat at home more.

Adopting quality compromiser and conscious consumer approaches become more common among retail shoppers as financial constraint grows. In fact, struggling paycheck-to-paycheck consumers are three times as likely to compromise on quality and nearly two times as likely to be conscious consumers.

Conclusion

Consumers continue to feel the financial crunch of rising prices for everything from gasoline to groceries. Moreover, most consumers report that their incomes have not kept up with inflation. As a result, consumers are adjusting their spending by abstaining or trading down to cheaper or lesser quality products. While this is true among all consumers, it increases as financial constraint does. Worried that inflationary pressures will continue unabated, paycheck-to-paycheck consumers continue to do what they can to make ends meet.

Read More

PYMNTS Intelligence provides leading coverage of the trends in consumers’ financial lifestyles in the face of ongoing inflation. For more, read any of our recent data reports chronicling the issues paycheck-to-paycheck consumers face.

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Methodology

“New Reality Check: The Paycheck-to-Paycheck Report — How Consumer Perception of Inflation Forces Many to Trade Down,” a PYMNTS Intelligence exclusive report, draws on insights from a survey of 2,583 U.S. consumers conducted from July 9 to July 18 and an analysis of other economic data. The Paycheck-to-Paycheck series expands on existing data published by government agencies, such as the Federal Reserve and the Bureau of Labor Statistics, to provide a deep look into the core elements of American consumers’ financial wellness: income, savings, debt and spending choices. Our sample was balanced to match the U.S. adult population in a set of key demographic variables: 51% of respondents identified as female, 33% were college-educated and 38% declared incomes of more than $100,000 per year.

<sup>1. [Author unknown. Consumer Price Index. U.S. Bureau of Labor Statistics. 2024. https://www.bls.gov/cpi/. Accessed August 2024.]↩
2. [Author unknown. Consumer Credit – G.19. Board of Governors of the Federal Reserve System. 2024. https://www.federalreserve.gov/releases/g19/current/. Accessed August 2024.]↩
3. [Author unknown. Current Employment Statistics – CES (National). U.S. Bureau of Labor Statistics. 2024. https://www.bls.gov/ces/. Accessed August 2024.]↩
4. [Author unknown. Consumer Price Index Summary. U.S. Bureau of Labor Statistics. 2024. https://www.bls.gov/news.release/cpi.nr0.htm. Accessed August 2024.]↩
5. [Author unknown. Examining U.S. inflation across households grouped by equivalized income. U.S. Bureau of Labor Statistics. July 2024. https://www.bls.gov/opub/mlr/2024/article/examining-us-inflation-across-households-grouped-by-equivalized-income.htm. Accessed August 2024.]↩
6. [Author unknown. Advance Monthly Sales for Retail and Food Services. U.S. Census Bureau. July 2024. https://www.census.gov/retail/sales.html. Accessed August 2024.]↩</sup>