Americans are paying more for just about everything these days. The double whammy of higher oil prices and poor weather conditions have resulted in rising manufacturing costs, which are passed along to consumers in the form of price jumps (often Olympic-sized).
As the U.S. economy strengthens, many fear these price increases will snuff out the fragile flame of consumer optimism and spending. However, in my research I've found the recession has created a more resilient and rational consumer -- one that is still wary but much more empowered and informed than before the Great Recession.
Volatile weather wreaked havoc on harvests, which in turn has affected the price of fruits, vegetables, wheat, grains and cotton -- otherwise known as groceries and clothing. It's also resulted in higher insurance premiums for consumers.
Fruits and vegetables cost about 23% more today than they did three months ago. And that means everything from juice to ketchup will cost more too. Higher grain prices make it more expensive to feed a cow, so beef and fast food are pricier too.
Clothing manufacturers are trying things like sewing cotton garments with synthetic thread to keep prices down. Still, consumers can expect a 10% increase in apparel prices this spring. The price of cotton has doubled in the past year because of poor weather conditions in China and restrictions on exports from India.
Increased international demand and political unrest in the Mideast have increased the price of oil, which means transportation and anything that requires shipping costs more.
The average American drives 13,476 miles a year in a vehicle that gets 24 miles per gallon. The average cost of gas a year ago this week was $2.86 -- today it's $3.81. That means the average car owner is paying about $45 a month more for gas today than they were a year ago. Pricier gas is also partly responsible for a 22% increase in airfare and public transportation fares in the past six months.
The Big Question
The big question, of course, is whether these inflationary trends will drive down consumer spending. Since the economic health of the country is so firmly tied to consumer spending, it's a serious question.
I believe, the the answer is a qualified "no." While many will certainly cut back on discretionary spending to compensate for higher priced basics there will not be an irrational "freak out."
Why? American consumers have been through a huge learning curve over the past several years while the recession rolled through the economy. Rather than be felled by the recession, the American consumer has emerged empowered. They have new ways of shopping and more resilience than ever. They're more conscious of how they spend, more resourceful, and more demanding of retailers.
In interview after interview consumers told me that they felt better about their spending habits following the recession. "Control" was the theme I heard more often than any other. "I feel more in control of my finances and so my future," and "I'm never going to let my credit card debt get out of control again."
Consumers shop differently now than they did before the recession. What might have started as a desperate hunt to get more for less turned into greater mastery of the marketplace. Aided by technology, consumers learned new research, bargaining and bartering skills.
For example, many bid adieu to familiar retailers in favor of small online merchants they found on eBay and Etsy. Others explored things like online coupons and mobile price comparison shopping. And they've come to rely on each other more than the assumed expertise of businesses. Consumer reviews, blogs and ratings sites have skyrocketed in popularity. Which is why despite higher prices for groceries and apparel, retail sales increased last month for the ninth month in a row.
Historically, gas prices are linked to consumer confidence. But not this time around. Consumer confidence actually rose this month despite a 5.6% increase in gas prices. This time around our newly empowered consumers have decreased their gas consumption 3.6%. It took consumers nearly a year to adjust their driving habits the last time we had a spike in prices. When consumers drive more slowly, keep their tires inflated and think twice about when they use their cars, they gain some control over what they pay at the pump.
Mastery = Control = Confidence = Less Reactivity
It's time to reconsider the economists' view of the American consumer as fragile, irrational and fickle. It's going to take more than price increases to fell the American consumer. There are plenty of things that will, like unemployment. But that's hardly irrational.
Bonus Stat: With all these price increases is anything that's less expensive? Computers and hotel stays.