In a high-inflation environment, it’s perhaps time to look at how consumers are being affected and how they are managing to cope. In Europe, of course, the impact of the war in Ukraine is being most directly felt, I would imagine. What with temperatures dropping, and prices and interest rates rising. Elsewhere too, it is going to impact household budgets and businesses as well.
The first and most important place to look would be consumers’ spending on essentials – food, groceries, household products, and the like. While it is true that consumer packaged goods usually stay the most resilient during economic downturns, there is always a tendency to cut back on spending or to trade down to a lower-priced product or brand. This is even more so for people in the lower income groups who tend to be very price-sensitive.
It is still early days to tell what effect the economic slowdown or recession – as is being expected in many developed economies in the west – will have on consumption of essential items, and we might have to wait for the December quarter of corporate earnings to come through in order to get a clearer picture. If the previous quarter is any indication, sales volumes are either flat or slightly lower for many FMCG companies, even as revenue is higher, thanks to higher prices. I think we might see an even more aggravated indication of this in the coming quarters, especially for companies that operate in the lower end of the market.
A study by McKinsey this year, among consumers in the US, UK, Europe and Asia-Pacific reveals the key concerns that consumers have about rising prices as well as the overall economic outlook. While this study was done to assess consumers’ shopping and consumption habits, post Covid-lockdowns easing, one can see the impact higher prices are already having.
Inflation in food and fuel are the ones that affect household spending the most and yet those are usually kept out of central banks’ calculations, since they tend to be volatile. However, in the case of fuel prices, as I have been pointing out time and again in the Indian context, high fuel prices for a sustained period tend to filter through to all other products and result in broadbased general inflation. Thankfully, it appears that crude oil prices are down from their highs and many other commodity prices too are trending down. This is mainly because of the economic slowdown/recession expected in the coming year, and also because China’s economic growth has slowed down considerably, reducing its demand for many commodities.
In India, retail audit and research companies such as Nielsen IQ and Kantar World Panel (of WPP) have been regularly reporting retail sales data, albeit only FMCG, and one knows of either a slowing down or badly depressed CPG retail market from reading the business news, where these are often reported. For example, as the rest of India had emerged from lockdowns and there was pent-up demand in the latter half of 2021, news of Nielsen and Kantar retail reports had suggested that there was a considerable slowdown in rural demand in India. According to the most recent report from Nielsen IQ, India reported a healthy double-digit growth of 10.9% in FMCG in Q2 (June) of 2022, and that the trend is likely to continue. This is growth by value, of course; if one looks at volume growth, Nielsen reports that volume contraction was led by preference for smaller pack sizes, even as unit sales increased.
In western economies, inflation is reported for fuel products as well as food, alcohol and tobacco as a category. Last time I checked Eurostat, the highest spikes in prices were no doubt in fuel and energy, but food and alcohol too registered a steep rise. Inflation in non-energy industrial goods and services has also risen in the Eurozone. Which means consumer price inflation is quite broadbased and general now, prompting the ECB to raise interest rates by 0.5% a few days ago. This article in Euromonitor International explains the impact of inflation on cost of living and consumer spending in western economies, which is expected to be significant in 2022, and will possibly continue in 2023.
In the US, consumer price inflation has been trending down, ever so slowly, though. From 7.7% annual inflation in October 2022, the CPI is down to 7.1% in November. Core CPI in the US is still around 6%. The US Federal Reserve has raised interest rates by 0.5% this time, though hinted at more rate increases in its policy statement announced just a few days ago.
I think that when we look at consumer spending on essentials, we ought to consider other important spending heads in a household as well: accommodation or housing (rented or for purchase) as well as education and healthcare. These are today becoming the most important costs of managing a home, especially among the richer countries with older populations. Besides, after two years of the terrible Covid-19 pandemic when education had taken a back seat, it deserves to be given utmost attention now, including in terms of its costs. And healthcare, which puts different kinds of pressures on rich, ageing societies and on poor, ill-equipped ones, also needs to be seriously considered.
These are what usually form the services part of the inflation index, even if they are not given enough importance. The Covid pandemic has prioritized the coronavirus over all other ailments and the world is still catching up with treatments for them. According to The Economist, the minimum waiting time for a doctor appointment in the otherwise fantastic and fabled NHS in the UK is weeks, if not days. They report that the NHS is in disarray now, because many staff are too exhausted after the pandemic, and there is a shortage of personnel. That kind of pressure might not reflect in higher monetary costs in the UK, but anywhere else, it would. Another article from Euromonitor International examines the health concerns of four different segments by age through a survey they conduct, and I found some of the health concerns being reported by GenZ and millennials quite alarming. There is no mention of the cost of healthcare as a concern, though, which I find surprising.
There is also the question of prices of drugs, which depend on critical chemicals that are often imported. In India, for example, we depend on China for APIs (active pharmaceutical ingredients) for manufacture of our pharmaceutical products. Since China has been in a self-imposed slow down thanks to their zero-Covid policy, manufacture and supply of these critical ingredients would have been seriously impacted, affecting the prices of Indian drugs.
Similarly, the war in Ukraine promises to keep the pressure on prices of wheat, sunflower oil, energy and critical chemicals used in the manufacture of fertilisers, high. On account of the last product mentioned, India has had to raise the fertilizer subsidy twice in as many years and has just tabled a proposal in parliament for supplementary spending to be approved. If farmers are not protected against rising fertilizer prices, we can only expect food prices to soar even higher. That puts poor and rural families whose shopping comprises mostly of food products, at serious risk.
In India, the November 2022 CPI came in a few days ago at 5.88% bringing great relief to many. However, this is no cause to celebrate since the core inflation is still at a stubborn 6.1%, and has held steady for more than a year.
As I have written in a previous post just recently, companies will have to navigate their way through the slowdown and recession that is expected in 2023. As central banks hike rates in an attempt to dampen consumer demand so that inflation may be tamed, consumers are already cutting back or trading down thanks to inflation. Both these forces ought to take us to lower inflation, or at least that part of it that is caused by higher wages and demand pressures. As interest rate hikes take effect, employment too might cool down, though not in the manner that is being seen in the tech industry.
There has been a spate of retrenchments announced by tech companies in the US and in India that had all boomed during the second year of Covid-19 – 2021 – and are now struggling to maintain or control costs in the wake of a slowdown. These are mostly the new-age internet tech companies such as Meta and Twitter in the US as well as Byjus, the ed-tech company in India along with many others. However, there is also Amazon and Microsoft among them. I, however, expect next year to be a year of growth in information technology and digitisation, even as the world copes with an economic slowdown.
And finally, the elephant in the room is the war in Ukraine, which is likely to keep supply of key commodities limited and their prices high. This, along with geopolitical tensions being caused by economic and trade wars between superpowers, and protectionism threaten to derail growth further. If countries show better sense and willingness to cooperate and keep trade channels open, we could see our way out of a recession and a slow-growth year in 2023. If not, companies, consumers and countries will all suffer more pain, for longer.
The animated owl gif that forms the featured image and title of the Owleye column is by animatedimages.org and I am thankful to them.