As the holiday season is quickly approaching, store revenues are falling for the first time since the 2007-08 crisis. Following high inflation numbers, retailers are struggling to maintain sales with elevated prices.
Inflation has hit its highest (7.75%) in 40 years and so consumer purchasing power is weak: “Consumers are spending more dollars, but they’re getting fewer items,” said economist Gregory Daco. It was projected that retailers would report a 4.5% growth in sales. However, retailers have had a 1.2% drop in real terms (with inflation taken into account). Some retailers remain optimistic with a large part of the holiday season still to go. For example, Michael Zdinak says, “Demand help up surprisingly well given how much prices have risen”. The combination of record-breaking inflation and historically low unemployment makes it tough for experts to forecast what will come in the following months.
On the other hand, some economists believe consumer expenditure will not change from last year. Stephanie Cegielski (vice-president of research at ICSC) said “they’ll be buying as much as last year” following data results. She saw that consumers were seeking more promotions and offers to help keep costs down but she saw no intention of consumers reducing their spending.
Consumers have increased and will increase their credit card borrowing as credit card balances increased by 15 per cent which was the steepest increase in 20 years. Crime rates have also risen at the fastest pace since the 2007-08 crisis. With crime being reasonably proportional to loan losses, banks should expect to end up with an overall loss on loans.
Source - Financial Times
In the graph above the drop in sales is forecasted to be 8-9% (the last time there was such a significant fall was in the 2007-08 crisis). Federal Reserve officials will try and cushion demand fall by largely increasing interest rates. This will help control the “unacceptably high” inflation rates.
As consumers have reallocated their spendings and borrowing costs are higher, many believe the only way that sales will go is downwards. However, if inflation is to be controlled, there has to be a trade-off somewhere and retailers are taking the hit this time.
Unfortunately for the United States, the retail market isn’t the only market which has suffered a fall in sales recently.
Source - Trading Economics
Although home sales seemed to recover from the pandemic in the closing quarters of 2020 and the whole of 2021, they have also taken a fall in 2022 (nearly as big as the pandemic’s). This can most likely be explained by the increased interest rates. These increased rates are counterproductive in the markets as they help bring down inflation but harm the housing market.
All goods and services markets are being negatively affected by the Central Bank’s decisions to stabilise inflation. Will the US be able to move forward and lower inflation rates, whilst keeping its country out of a crisis?
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